Bonds Outlook 2026: “Risk factors are not going away”
Geopolitical conflicts, Trump turmoil, monetary policy, economic crisis—the old year brought a number of challenges for the bond markets. Traders and analysts are not expecting a quiet new year.
January 9, 2026. FRANKFURT (Deutsche Börse). The new year is also likely to be challenging—at least according to Arthur Brunner, who trades bonds for ICF Bank, with regard to geopolitical conflicts, central bank decisions, and economic weakness. “However, the most exciting topic in 2026 is likely to be the change at the top of the US Federal Reserve,” he says. According to Gregor Daniel of Walter Ludwig Wertpapierhandelsbank, the issue of key interest rate developments will “always preoccupy” the markets. “In addition, further surprises from US President Trump are to be expected,” he adds.
According to Tim Oechsner of Steubing AG, monetary policy will remain the most important factor. “In the US, moderate interest rate cuts by the Fed are expected for 2026,” explains the trader. “No aggressive easing cycle, more like fine-tuning.” In the eurozone, on the other hand, the ECB will remain closer to stabilization. The ECB has cut its key interest rate eight times between mid-2024 and mid-2025 to its current level of 2 percent. In the US, where inflation is even higher, the rate is currently 3.5 to 3.75 percent.
New US Federal Reserve Chair: “Definitely someone close to Trump”
A major topic on the capital markets is the succession plan for US Federal Reserve Chair Jerome Powell. His term expires at the end of May 2026. “It will definitely be someone close to Trump,” notes Brunner. The favorite to succeed him is Kevin Hassett, currently head of the National Economic Council (NEC). “According to betting and prediction markets, the probability is currently around 80 percent,” Oechsner notes. Hassett stands for a significantly more dovish monetary policy than Powell – i.e., more interest rate cuts.
Venezuela bonds stronger
Current developments also show that geopolitical conflicts have a direct impact on the bond market. “Venezuelan bonds have risen significantly this week, albeit from a low level and with low trading volumes,” reports Walter Ludwig trader Daniel. A Venezuelan bond denominated in US dollars (USP17625AE71) maturing in October was trading at 43 percent on Friday morning. Before the US attack on the country, it was trading at around 30 percent.
“Government bonds are not a sure thing”
Government bonds are generating returns again, as Oechsner notes, but they are not a sure thing. “The days when they automatically served as a safe haven are over.” According to the Steubing trader, yields on long-term bonds could rise this year – not because of inflation, but because of high government debt, increasing issuance activity, and growing risk and term premiums. “Short-term bonds remain attractive, while long terms again require an active decision.”
Germany: Record issuance volume
Indeed, high government debt is a cause for concern in many countries, including the US, France, and Germany. “Germany is planning record issues of federal securities totaling over €512 billion in 2026,” reports ICF trader Brunner. This includes a new 20-year bond. “However, there will be no inflation-linked bonds this year,” he adds. According to Helaba, rising government debt has recently affected long maturities in particular: “The growing volume of government bond issues is meeting with cautious investors,” explains analyst Ulf Krauss. The neutral monetary policy of the central banks should ensure a certain degree of stability for bonds. However, the bank points to the massive rise in yields in Japan, which is unsettling bond investors worldwide.
The yield on ten-year German government bonds rose from 2.37 percent to 2.86 percent in 2025. On Friday morning of the first full trading week, it stood at 2.83 percent. By contrast, the yield on comparable US Treasuries fell from 4.56 percent to 4.18 percent in 2025.
Default risks for SME bonds?
Tim Oechsner also expects continued interest in investment-grade corporate bonds – at least as long as the economy does not take a significant downturn. “High yield only works in a stable economy – it's not something you can put on autopilot.” He also considers emerging market bonds to be selectively attractive. However, their performance is heavily dependent on the US dollar, politics, and capital flows.
There has already been some bad news from the SME segment in 2025, for example from automotive supplier Paragon (DE000A2GSB86), real estate developer Noratis (DE000A3H2TV6) and green energy provider Abo Energy (DE000A3829F5). “Many companies in the segment are struggling,” Brunner notes. Daniel points to the expected record number of large-scale insolvencies in Germany and insolvency figures that are expected to reach the levels seen during the financial crisis. “This could also spell trouble for some SME bonds.”
“The risk factors will not disappear in 2026, but will remain the same,” Oechsner sums up: geopolitical conflicts, trade disputes between the US and China, valuation issues in the AI sector, high US government debt, and the debt problems of individual European countries such as France. In view of the uncertainties, the only thing that helps is to diversify the portfolio, says Daniel. “You have to be prepared for the unexpected.”
By Anna-Maria Borse, January 9, 2026, © Deutsche Börse AG
About the Author
Anna-Maria Borse is a finance and economics editor specializing in financial markets/stock exchanges and economic issues.
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