The first quarter of 2026 brought many interesting developments for bond investors. Renewed inflation concerns pushed yields higher, reversing early gains and leaving the Bloomberg U.S. Aggregate Bond Index slightly negative for the quarter. At the same time, expectations for Federal Reserve rate cuts shifted meaningfully, with the probability of a cut falling to roughly 37%, down from 72% at the end of 2025.
Taken together, these developments drove a notable move in Treasury yields. The 10-year yield rose as high as 4.44% before ending March at 4.32%, while the 2-year climbed to 4.00% before settling near 3.80%.1 Short-term yields rose faster than long-term yields, flattening the curve modestly, though it remains slightly upward sloping (in the chart below, data points above 0 represent an upward sloping yield curve).
While rising yields pressured bond prices, they also improved something largely missing from fixed income for much of the past decade: income. Today’s yields are meaningfully higher than in the post-2010 period, and a larger share of expected returns is now coming from income rather than price appreciation. That shift suggests bonds may once again serve a more traditional role in portfolios, not only as an instrument for reducing overall volatility but also as a source of steady cash flow. In my view, this means investors who have been content with cash (money market) returns in past years may want to give the bond market a closer look. In 2025, broad fixed income returned roughly 7.3%, compared to about 4.3% for cash, marking the first time in several years that bonds meaningfully outperformed. 3 This outperformance reflects both higher starting yields and a gradual steepening in the yield curve, where extending beyond cash is once again being rewarded.
The macro backdrop also appears to be evolving in a way that could support the income story. While headline inflation has moved higher, much of the pressure has been driven by energy prices. Beneath the surface, core inflation remains more contained (2.6% in March), and longer-term expectations have stayed relatively anchored. Meanwhile, we know the labor market is the weak link in the Fed’s inflation/labor mandate. The unemployment rate has risen to approximately 4.3% as of March 2026, up from a 3.4% low in 2023, with hiring trends becoming increasingly uneven. March payrolls rose by +178,000, but in February was revised to -133,000, underscoring volatility in the data.4 If we look more broadly at annual monthly job gains, we can see a stark and steady weakening pattern, which I have argued before likely means a bias towards more cuts in 2026.
For bond investors, this combination is important. Stable underlying inflation helps preserve the real value of income, while signs of a cooling labor market, I think, rule out the possibility of further policy tightening. In practical terms, that means less upward pressure on yields and a more supportive backdrop for bond prices.
Finally, a quick note on the municipal bond market outlook from here. Rising Treasury yields have pushed municipal yields higher as well, improving their relative attractiveness, particularly for investors in higher tax brackets. The yield curve remains slightly upward sloping, and while valuations have not changed dramatically, income levels are more compelling than they were just a few years ago. At the same time, fiscal conditions for state and local governments remain stable, supporting the overall credit backdrop. As a result, municipals continue to serve as a useful tool for tax-efficient income within a diversified fixed income allocation.
Bottom Line for Investors
After years when cash looked unusually competitive and bonds offered limited yield, investors now have more ways to be compensated for taking measured fixed income risk. For investors with cash that is not needed in the near term, but that you still want to treat conservatively, this may be an opportunity to reassess whether staying on the sidelines still offers the best risk/reward tradeoff. Because today’s fixed market offers income that can contribute meaningfully to total return while still playing a stabilizing role in portfolios.
1Wall Street Journal. 2026. https://www.wsj.com/world/middle-east/u-a-e-opec-new-middle-east32ceda56?mod=Searchresults&pos=1&page=1
2 Wall Street Journal. April 30, 2026. https://www.wsj.com/economy/central-banking/u-s-economygrew-at-2-rate-in-first-quarter-6e0c18cc?mod=economy_lead_story
3 Financial Post. April 29, 2026. https://financialpost.com/pmn/business-pmn/us-core-capital-goodsorders-jump-by-most-since-2020
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