Download the 02.13.26 Q4 2025 Dynamic Bond Markt Update for advisors’ use with clients
By Bill Smith, Fixed Income Trader and Portfolio Manager
2025 was an eventful year in the fixed income markets, punctuated by 75 basis points of easing from the Federal Reserve (Fed), the United States losing its last remaining AAA rating, and significant volatility driven by fiscal and trade policy uncertainty. Against this backdrop, fixed income performed well, with many major bond indices returning more than 7% for the year. While investment-grade and high-yield municipals had a strong Q4, they remained relative underperformers for the year, returning 3.92% and 3.35%, respectively. U.S. high yield and emerging market corporate bonds continued their outperformance, returning more than 8% each.
The charts below summarize the yield and performance of select fixed income tenors and indices as of Dec. 31, 2025:
Past performance is not a guarantee of future results.
As we move further into 2026, four key themes that shaped the fixed income markets last year are expected to remain in focus:
1. Further Monetary Easing Appears Likely
As of February 11, Fed funds futures have priced in at least two 25 basis-point rate cuts this year, with a 100% probability of the first occurring at the Federal Open Market Committee (FOMC) meeting in July, according to Bloomberg’s interest rate probability model. While inflation and labor market data can change this narrative, lower rates remain the base case.
Source: Bloomberg as of Feb. 11, 2026. Past performance is not a guarantee of future results.
2. Easing is Generally Constructive for Fixed Income
Lower rates often translate into higher bond prices, and an additional two rate cuts from the Fed would likely provide a tailwind for fixed income total returns in 2026. While past performance is no guarantee of future results, for every calendar year over the last 25 that had at least one rate cut, the Bloomberg Aggregate Bond Index had a positive return, as illustrated in the chart below.
Source: Bloomberg. Past performance is not a guarantee of future results.
3. Yields Remain High
Yields across major fixed income sectors remain attractive. Except for high yield in the chart below, Treasury, corporate, and municipal bond indices are still yielding well above their five and 10-year averages. For income-oriented investors, now may be a good time to look at the bond market.
Source: Bloomberg, ICE DATA INDICES, LLC (“ICE DATA”), as of Feb. 11, 2026. Past performance is not a guarantee of future results.
4. Headline Risks Remain for U.S. Treasuries
Recent Bloomberg news articles have reported Chinese regulators advised financial institutions to reduce and/or limit future purchases of U.S. Treasury (UST). While this has garnered attention in the news cycle, China’s holdings of UST have been steadily declining since 2013. Rather than representing a fundamental shift, this announcement appears to reinforce a well-established trend. Importantly, total foreign holdings of U.S. debt have been steadily increasing, which should help allay fears of an imminent yield spike due to a foreign buyer strike, as illustrated in the chart below. While rising U.S. debt levels and interest costs pose long-term challenges, the U.S. Treasury market remains the world’s largest and most liquid, serving as the bedrock of the global financial system.
Source: Bloomberg. Past performance is not a guarantee of future results.
With additional easing likely and yields still attractive, the bond market enters 2026 with a constructive backdrop. While policy headlines and debt concerns may create periodic volatility, global demand for income remains intact, and fixed income should continue to play an important role in well-diversified portfolios.
Fixed income. Flexible thinking.
A prudent approach to fixed income investing calls for diversification across both credit and duration exposure. As always, Dynamic recommends staying balanced, diversified and invested. Despite short-term market pullbacks, it’s more important than ever to focus on the long-term, improving the chances for investors to reach their goals.
Should you need help navigating fixed income for your clients, contact Dynamic’s Asset Management team at (877) 257-3840, ext. 4, or assetmanagement@dynamicadvisorsolutions.com.
Bill Smith serves as president, Portfolio Management & Trading, of Harmont Fixed Income in Phoenix.
Disclosures
This commentary is provided for informational and educational purposes only. The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. This is not intended to be used as a general guide to investing, or as a source of any specific recommendation, and it makes no implied or expressed recommendations concerning the manner in which clients’ accounts should or would be handled, as appropriate strategies depend on the client’s specific objectives.
This commentary is not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investors should not assume that investments in any security, asset class, sector, market, or strategy discussed herein will be profitable and no representations are made that clients will be able to achieve a certain level of performance, or avoid loss.
All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed as to its accuracy or reliability. These materials do not purport to contain all the relevant information that investors may wish to consider in making investment decisions and is not intended to be a substitute for exercising independent judgment. Any statements regarding future events constitute only subjective views or beliefs, are not guarantees or projections of performance, should not be relied on, are subject to change due to a variety of factors, including fluctuating market conditions, and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified and are beyond our control. Future results could differ materially and no assurance is given that these statements or assumptions are now or will prove to be accurate or complete in any way.
Past performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed.Investment advisory services are offered through Dynamic Advisor Solutions, LLC, dba Dynamic Wealth Advisors, an SEC registered investment advisor.