The strongest annual return in nearly five years is expected. Can the bull market in the bond market continue until 2026?

Driven by the interest rate cuts by the Federal Reserve, easing inflation pressures, and a slowdown in the labor market, the bond market is expected to end 2025 with its best performance in nearly five years. However, several market experts caution that the return potential for bonds may be lower in 2026. Data shows that as of Thursday, the total return of the US composite bond index for 2025 has surpassed 7%. This index covers US Treasury bonds, government-related bonds, corporate bonds, as well as mortgage-backed securities and asset-backed securities. In comparison, the return rate for this index was only 1.25% in 2024 and 5.5% in 2023. This rebound occurred as bond investors were still trying to recover from the historic lows in 2022 when the Federal Reserve implemented the fastest rate hike cycle in nearly 40 years to curb inflation, causing the index to drop more than 13% that year, marking its worst performance on record. Although bond prices have recovered some lost ground since then, it is widely believed in the market that the strong momentum of 2025 may not fully continue into 2026. On one hand, some investors are skeptical about whether the Federal Reserve can continue to cut rates significantly in 2026; on the other hand, the yield on US Treasury bonds has already significantly declined this year, reducing the attractiveness of buying bonds at current prices. As bond prices and yields move in opposite directions, a decrease in yields means that prices have been pushed higher. Taking the 10-year US Treasury bond yield as an example, this important benchmark yield that affects mortgages, car loans, corporate financing costs, and government borrowing costs has dropped from approximately 4.58% in January to the current 4.12%. Expectations for further rate cuts and signs of economic slowdown have collectively driven bond prices higher. Collin Martin, Director of Fixed Income Research and Strategy at InTouch Wealth Management Research Center, stated that the impressive performance of bonds in 2025 is mainly due to two factors: higher coupon income and capital gains from price increases. He pointed out that at the beginning of the year, bond yields were at a relatively high level, allowing investors to receive significantly higher coupon income than in previous years, and as the Federal Reserve cut rates and yields gradually decreased, bond prices also rose. Looking back at previous trends, at the end of 2024 and the beginning of 2025, US Treasury bond yields briefly rose due to market concerns that the Trump administration's tariff and trade policies might reignite inflation. However, inflation has remained relatively stable, allowing the Federal Reserve to shift its policy focus to the softening labor market. So far this year, the Federal Reserve has cut policy rates three times by 25 basis points each. The latest November inflation data shows that consumer prices increased by 2.7% year-on-year, lower than the 3% recorded by the end of September. As a "stabilizer" in traditional investment portfolios, bonds still play an important role in asset allocation for many investors, due to their stability, return potential, and risk diversification characteristics. The classic "60/40" portfolio structure (60% stocks, 40% bonds) remains the core structure in most retirement investment recommendations. Bonds not only provide returns through regular coupon payments but could also bring about capital appreciation and pay out at face value upon maturity. Martin believes that even if the price increase potential for bonds in 2026 is not as strong as in 2025, bonds still offer value for allocation. He emphasized that the main purpose of holding bonds is to generate stable income, rather than betting on a significant price increase; at the same time, bonds can still provide diversification and long-term stability in a portfolio, and the 60/40 allocation concept is still relevant. He expects that the bond market could still achieve positive returns next year, although the strength may not replicate this year's performance. Daniel Tenengauzer, Senior FX Analyst at InTouch Capital Markets, pointed out that although bonds are expected to have their best year since 2020, the current environment is very different from that year. Five years ago, the global economy was in recession, and bonds saw a significant rally as the market bet on large-scale fiscal stimulus; however, now, with relatively stable economic fundamentals, it remains uncertain whether further stimulus measures from either the Federal Reserve or the Trump administration would have the same effect. Tenengauzer warned that if additional fiscal stimulus reignites inflationary pressures, it may actually be detrimental to the bond market. In this scenario, the yield on 30-year US bonds could rise, triggering risks of long-term bond sell-offs. Therefore, from this perspective, the outlook for bonds in 2026 is not very optimistic.