Global bond markets started the year on a positive note, supported by expectations that slowing inflation would allow the US Federal Reserve to cut rates by around 0.75% in 2026, while the European Central Bank (ECB) could keep rates unchanged at 2%.
Against this backdrop, US and European 10-year bond yields declined by around 0.2% between early January and the end of February. Government bonds delivered returns of roughly 2% over this period, outperforming credit and emerging market debt (EMD), which gained around 1%.
However, the escalation of the conflict between the US, Israel and Iran on 28 February marked a clear turning point. Markets initially assumed a short-lived conflict, but quickly realised that, despite a ceasefire, reaching a lasting agreement would be difficult.
"}},{"componentType":"sectionTitle","title":"Stagflation concerns weigh on government bonds"},{"componentType":"paragraph","richBody":{"value":"A temporary stagflationary shock scenario soon gained traction, characterised by weaker growth, rising inflation and worsening public finances. This combination has historically been unfavourable for bond markets, as seen in the 1970s, in 2022 and again since early March 2026.
Long-term government bond yields have risen sharply, in some cases reaching levels not seen in over 20 years. US 30-year yields (5%) are close to their highs since 2023, while in Japan (3.9%) and the UK (5.6%), long-term yields have returned to levels last seen in the late 1990s.
"}},{"componentType":"sectionTitle","title":"Credit and emerging markets show resilience"},{"componentType":"paragraph","richBody":{"value":"Credit markets — particularly high-yield bonds — as well as EMD, have weathered this environment much better. Risk premiums (spreads) have remained relatively stable despite increased volatility in government bond markets.
These segments benefit from shorter maturities (typically 5–6 years) and yields above 5%. As a result, they have delivered positive returns both since the start of the year and since the escalation of the conflict in Iran, whereas government bonds have posted negative returns.
"}},{"componentType":"sectionTitle","title":"Less supportive policy environment ahead"},{"componentType":"paragraph","richBody":{"value":"The recent rise in US and European inflation has been largely driven by higher energy prices. Although the peace agreement between the US and Iran reduces the risk of further inflationary pressure, we expect the monetary backdrop in the second half of the year to be less supportive than initially anticipated.
The ECB has already raised rates and may do so again before year-end. In the US, the expected rate cuts are increasingly likely to be replaced by a prolonged pause in policy rates. At the same time, central banks are continuing to reduce their balance sheets, which puts additional pressure on bond markets. In the US, this process may accelerate, as new Fed Chair Kevin Warsh has expressed clear opposition to further balance sheet expansion.
"}},{"componentType":"sectionTitle","title":"Rising debt levels keep upward pressure on yields"},{"componentType":"paragraph","richBody":{"value":"The energy shock is also translating into a fiscal shock, as it reduces income while increasing government spending. According to the IMF, global public debt could rise to 100% of GDP by 2029, up from 95% last year.
As public finances deteriorate – and credit ratings come under pressure – investors are likely to continue demanding higher yields to compensate for risk. Even though a large part of the rise in long-term rates may already be behind us, we expect government bonds to remain under pressure.
"}},{"componentType":"sectionTitle","title":"Preference for high yield and emerging markets"},{"componentType":"paragraph","richBody":{"value":"In this environment, we remain underweight government bonds relative to high-yield credit and EMD. As long as a recession is avoided, we believe these segments offer better protection against inflation and more attractive return prospects. High-yield bonds are supported by solid fundamentals: corporate leverage has declined significantly over the past decade, while government debt has increased.
In addition, yields remain more attractive. High-yield bonds offer around 7%, while emerging market bonds yield approximately 6% (in hard currency), compared with around 3.5% for government bonds. Higher yields and shorter durations provide a stronger buffer against rising interest rates.
"}},{"componentType":"sectionTitle","title":"Conclusion: opportunities in a challenging environment"},{"componentType":"paragraph","richBody":{"value":"Despite the challenges, we remain broadly neutral on fixed income as an asset class. The rise in bond yields is creating opportunities for active investors.
Around 80% of the global bond market now offers yields above 4%, a level not seen in over 20 years and currently above inflation. In this environment, we expect moderate returns from corporate bonds: around 0.5% for investment-grade credit and more than 3% for high-yield bonds.
"}},{"componentType":"linkList","iconTitle":{"title":"Read more"},"textLinks":[{"text":"Midyear outlook 2026: Homepage","url":"/en/personal/investing/market-news-and-views/investment-outlook-2026-home"},{"text":"Midyear outlook 2026: Equities","url":"/en/personal/investing/market-news-and-views/investment-outlook-2026-equities"},{"text":"Midyear outlook 2025: Economy","url":"/en/personal/investing/market-news-and-views/investment-outlook-2026-economy"},{"text":"Midyear Outlook 2026: download PDF","url":"https://assets.ing.com/m/7dfc82cb56e72468/original/Investment-Outlook-2026.pdf"}]},{"componentType":"sectionTitle","title":"Good to know"},{"componentType":"paragraph","richBody":{"value":"Investing involves risks and costs. The value of your investment may fluctuate. Past performance is no guarantee of future results. Read more about the risks of investing
This publication has been prepared on behalf of ING Bank N.V. and is intended for information purposes only. ING Bank N.V. obtains its information from sources deemed reliable and has taken the utmost care to ensure that the information on which it based its views in this publication was not incorrect or misleading at the time of publication. ING Bank N.V. does not guarantee that the information it uses is accurate or complete. The information contained in this publication may be changed without any form of announcement. Copyright and data file protection rights apply to this publication. Data from this publication may be reproduced provided that the source is stated. ING Bank N.V. has its registered office in Amsterdam, commercial register no. 33031431, and is regulated by the Dutch central bank De Nederlandsche Bank (DNB) and the Netherlands Authority for the Financial Markets (AFM). ING Bank N.V. is part of ING Groep N.V.
"}}]},"hasMacro":false,"id":"d0a4d3f2-55b9-49e1-874c-079c5820cad8","localeString":"en-GB","mainHeaderZone":{"backLink":{"textLink":{"text":"Market news and views","url":"/en/personal/investing/market-news-and-views"}},"componentType":"productHeader","coreHeader":{"body":"The fragility of government bond markets is becoming increasingly apparent, as reflected in rising bond yields. Inflation driven by the war with Iran and deteriorating public finances have led investors to demand higher compensation for risk. In this volatile environment, high-yield bonds and emerging market debt stand out as relatively resilient segments.","headerImage":{"altTextNL":"\"\"","extension":"jpg","original":"https://assets.ing.com/asset/c4296e31-aec7-4259-9f1f-196f9216f8ea/LOW-ANGLE-VIEW-OF-MAN-RIDING-BICYCLE-AGAINST-SKY.jpg","transformBaseUrl":"https://assets.ing.com/transform/c4296e31-aec7-4259-9f1f-196f9216f8ea/LOW-ANGLE-VIEW-OF-MAN-RIDING-BICYCLE-AGAINST-SKY","type":"image","width":1903},"subtitle":"Bond markets under pressure as yields rise","title":"Mid-Year Outlook 2026: Fixed income"}},"publishDate":"2026-06-25T12:46:23.686+02:00"}}