Active Fixed Income Perspectives Monthly Pulse: February 2026
Expert Perspective
|February 25, 2026
Active Fixed Income Perspectives Monthly Pulse: February 2026
Key takeaways
In our base case, we continue to expect near‑trend level U.S. GDP growth in 2026 backed by surging capex investment, resilient consumer demand, supportive fiscal policy, and less restrictive monetary policy.
We expect this firm growth environment will result in further strengthening in the labor market and will keep inflation modestly above target. We expect the Federal Reserve to remain cautious about further rate cuts.
The balance of risks around our base case are skewed toward stronger growth and softer inflation and labor market outcomes. AI’s impact on productivity remains a key driver of uncertainty.
We remain constructive on risk assets but with an emphasis on valuation discipline and selective carry.
Outlook: Firm growth backdrop with the labor market in focus
Our base case is for U.S. economic growth to remain near trend over the next year, supported by surging capex investment spending, resilient consumer demand, supportive fiscal policy, and less restrictive monetary policy. In this environment, inflation is likely to remain modestly elevated while the unemployment rate gradually falls. Against such a backdrop, we expect the Fed would proceed cautiously with further rate cuts.
AI capex investment and adoption are accelerating and are important contributors to our higher growth outlook. Nonetheless, AI’s impact on productivity remains a key driver of uncertainty. Faster-than-expected productivity improvements could ease inflation pressures while softening labor demand, potentially creating more scope for policy easing and supporting risk assets. Conversely, a slowdown in AI investment or weaker than expected technological progress would likely weigh on growth and ultimately pressure the labor market and lower inflation—an outcome that could still prompt Fed cuts, but with negative implications for risk assets.
The labor market continues to adjust. The labor market remains in focus as it continues its transition toward a new equilibrium characterized by lower supply and demand for labor. While the last two months of data showed slight declines in the unemployment rate, this balance remains fragile, and a lower breakeven rate of job growth increases the probability of multiple negative employment prints over the course of the year.
The balance of risks around our base case is modestly skewed to the upside for economic growth and to the downside for inflation and the labor market.
Our active positioning: Constructive on risk assets, with a focus on valuation discipline and selective carry
Rates: Neutral U.S. duration while capitalizing on global dispersion. In U.S. rates, we are strategically neutral on duration and curve. In the mortgage-backed securities (MBS) sector, spreads have tightened materially since the announcement of government-sponsored enterprise (GSE) purchasing of MBS. We hold a slight overweight position in securities where we believe spreads still have room to compress.
Across developed market economies, divergent economic trends and monetary policy have created relative value opportunities in global rates. We prefer to be overweight peripheral European sovereigns versus core sovereigns, and we have a short duration, curve-flattening bias in Japan.
Credit: Overweight but leaning into higher quality carry and selection. In credit, we expect corporate spreads to remain range-bound through the first half of 2026, supporting an overweight focused on selective carry. Trend-like growth, strong corporate fundamentals, and a neutral-to-supportive Fed underpin a constructive outlook for credit. Security selection remains key to alpha generation.
Municipals: Steep curve creates opportunity.
The steepness of the muni curve offers compelling return potential, with carry and roll-down particularly attractive for bonds between 10 to 20 years to maturity. We continue to hold a long muni duration position as a hedge against our long credit exposure.
PDF
Active Fixed Income Perspectives—Monthly Pulse
Here’s a PDF version of the article for convenient download.
PDF
Dive deeper with Active Fixed Income Perspectives: Our Quarterly Roundup
Here’s a PDF version of our in-depth quarterly perspectives
For more information about Vanguard funds, visit advisors.vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
All investing is subject to risk including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. Past performance is no guarantee of future results.
Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.
Investments in bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.
U.S. government backing of Treasury or agency securities applies only to the underlying securities and does not prevent share-price fluctuations. Unlike stocks and bonds, U.S. Treasury bills are guaranteed as to the timely payment of principal and interest.
Municipal bond fund distributions, including any market discount recognized by the Fund's investments, may be taxable as ordinary income or capital gains. A majority of the income dividends that you receive from the Fund are expected to be exempt from federal income taxes. However, a portion of the Fund’s distributions may be subject to federal, state, or local income taxes or the federal alternative minimum tax. You should consult your own tax advisor with respect to any particular U.S. or non-U.S. tax consequences of your investment in the Fund.
CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.