Investors will continue to get solid income in bonds in 2026, but should not take too much risk, according to Wells Fargo Investment Institute. The firm anticipates interest rates and credit spreads will remain rangebound next year, with the 10-year Treasury yield ending 2026 between 4% and 4.5%. It also believes the Fed, which cut interest rates by a quarter percentage point this week, will likely further reduce rates towards a neutral policy rate. Therefore, the yield curve should steepen as shorter-term rates move lower and yields in intermediate- and long-term assets rise, Wells Fargo said in its 2026 outlook. "Yield should remain the central goal for investors in 2026, and credit quality the key metric to watch, as earnings durability and continued capital-market access likely drive strong investment-grade and high-yield corporate issuer performance," Wells Fargo said in its 2026 outlook. With short-term rates falling, investors should also reconsider their cash holdings , said Brian Rehling, head of global fixed income strategy. Yields have already dropped from 5% to around 4% on money market funds, yet a record total of $7.66 trillion is sitting in the products, as of Wednesday, according to the Investment Company Institute . "You want to look to get out of the cash, but you don't want to go too long," he said at the firm's outlook presentation. That means taking some credit risk but sticking with maturities between three to seven years, he noted. With credit spreads at very tight levels, there will not be a lot of upside in terms of price appreciation, Rehling said. "This bond market is a yield market," he said. "So you want to go find yield, and I think your yields, for the most part, are going to be pretty close to what your returns are." Therefore, Rehling is focusing on areas where he can get attractive yields without taking undue risk. That means investment-grade corporate bonds and securitized assets, such as residential mortgage-backed securities and asset-backed securities, he said. Within investment-grade bonds, there is relative value in sectors less impacted by tariffs and the rapid change in technology, such as financials and telecommunications, the firm said in its outlook. Rehling doesn't believe the risk-return is there for lower-rated, riskier bonds. "If we would have some unexpected hiccup in the economy, those are going to get beat up pretty hard," he warned. In addition, Wells Fargo likes municipal bonds for those in high tax brackets, particularly investment-grade local general obligation bonds and water, sewer and electric revenue bonds.
