With Japanese bond yields hitting record highs, we’re looking at why, as well as the expectations for interest rates in 2026 for the US, UK and Europe.
This article isn’t personal advice. If you’re not sure whether an investment is right for you, ask for financial advice. All investments and any income from them can fall as well as rise in value, so you could get back less than you invest. Yields are variable and not a reliable indicator of future income. Past performance also isn’t a guide to the future.
Japan
Japanese bond yields spiked in January with expectations of rising government debt following newly appointed Prime Minister Sanae Takaichi’s spending plans. With inflation proving sticky, interest rates are expected to rise this year, also adding upward pressure on government bond yields.
Yields on the 10-year bond reached the highest levels since 2007 and the longer dated 40-year bond breached 4% for the first time ever.
Takaichi has proposed a $135bn stimulus package, the largest since the pandemic. She also plans on suspending the current 8% sales tax on food for two years. This has fuelled concerns that looser fiscal policy will add more pressure on government debt, leading to higher inflation.
Japanese bond yields previously had a very tight range as the Bank of Japan was buying bonds if yields started rising too much. This is called yield curve control. But this ended in March 2024, making the recent yield rises possible.
The US
US bond yields have come down over the past 12 months and remained relatively steady in the last few months after a volatile start. This volatility came from speculation about the impact of Trump’s tariffs.
A big concern for bond investors was that the tariffs would spike inflation and force the Federal Reserve (Fed) to increase interest rates. But this hasn’t played out.
Inflation ended the year at 2.7%. When Trump re-entered the Oval O 12-monthsffice in January it was 3% and fell to 2.3% in April just before the Liberation Day tariffs. Inflation didn’t rise as much as many expected and bond yields have been less volatile as expectations of interest rate rises decreased.
Going into 2026, the Fed held interest rates at 3.75% in January with expectations that rates will fall just once this year.
However, Trump recently announced Kevin Warsh will replace outgoing Fed chairman Jerome Powell. Warsh is expected to take over in May. Trump has been very critical of Powell for not cutting interest rates and he’ll be expecting Warsh to be more amenable.
If Trump does get his way and Warsh can convince his other committee members to lower interest rates more than the market is expecting, we may get some more volatility in yields throughout the year.
The UK
Like in the US, after a volatile start to the year in 2025, yields more recently have been steadier.
There are a few reasons for this. One being that the Autumn Budget went mostly as expected, with Chancellor Rachel Reeves taking what many deemed the fiscally responsible route.
Also having an impact will be the relatively stable inflation numbers in the second half of 2025. Inflation came in at 3.4% in December which is still above the Bank of England’s (BoE) 2% target. However, concerns of a slowdown in the labour market and low GDP growth has meant the BoE cut interest rates to 3.75% in December before holding steady in their January meeting.
Going into 2026, the expectation is that inflation will continue to fall, allowing the BoE to continue lowering interest rates. This, combined with the slowdown in the labour market and weak GDP growth, means economists are expecting at least two more rate cuts over the year.
Europe
The European bond market has also been relatively stable over the last 12 months. There was some volatility around Liberation Day as investors weighed the impact of higher tariffs on exports to the US but, since then, bond yields have been stable.
What is helping is that unlike in the US and the UK where inflation remains stickier, in Europe it’s below target. In January 2026 it came in at just 1.7%.
What this means for interest rates going into 2026 is that they will likely remain unchanged. With inflation on target and no immediate signs of labour market weakness, it’s unlikely the European Central Bank (ECB) will feel the need to adjust rates anytime soon.
Despite expectations that rates will remain the same, the ECB have much more flexibility than other central banks who are balancing higher inflation with a slowing labour market.
The ECB could perhaps react much quicker to the data should there be signs of a slowdown given that inflation is under control.
How have bonds performed over the last 12 months?
Performance has been different for different parts of the bond market over the last 12 months.
Higher-risk bonds within the high yield category have provided the highest returns, while UK government bonds have provided the lowest. This is largely because of the yields those bonds offer.
Companies with a higher risk of defaulting have to offer higher returns so investors take the additional risk.
While returns varied within the different sectors, corporate bonds have tended to provide the highest returns. UK government bonds have also given investors positive returns, but to a lesser extent over the last 12 months. The range of returns has been closer compared to prior years.
Annual IA sector percentage growth
31/01/2021 To 31/01/2022 | 31/01/2022 To 31/01/2023 | 31/01/2023 To 31/01/2024 | 31/01/2024 To 31/01/2025 | 31/01/2025 To 31/01/2026 | |
|---|---|---|---|---|---|
IA UK Gilts | -6.81% | -19.59% | -1.71% | 0.10% | 4.10% |
IA Sterling Strategic Bond | -0.49% | -7.63% | 4.95% | 5.70% | 6.89% |
IA Sterling High Yield | 2.21% | -5.53% | 8.27% | 9.02% | 6.93% |
IA Sterling Corporate Bond | -3.51% | -11.19% | 4.33% | 4.77% | 6.41% |
The IA £ Strategic Bond sector returns have been fairly consistently in the middle of the range over time, as you’d expect given funds in that sector can invest in all types of bonds.
This highlights the potential benefits of investing in those funds. While the overall returns might not have been the highest available, the journey hasn’t been as bumpy.
How have our fixed income Wealth Shortlist funds performed?
Our Wealth Shortlist bond funds have delivered mixed performance over the past year. Some have outperformed their peer group, while others have underperformed.
We would never expect them to perform the same though. If all your funds in a sector are performing well at the same time, they're probably just investing in similar areas. As always, past performance isn’t a guide to future returns.
Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a long-term diversified portfolio.
For more details on each fund and its risks, including charges, see the links to their factsheets and key investor information below.
Jupiter Strategic Bond
The best-performing Wealth Shortlist fixed income fund over the past year was Jupiter Strategic Bond, returning 9.99%*.
The fund focuses on a combination of paying income and capital growth. It invests in different types of bonds from all over the world, meaning it could be used as the foundation for the bond portion of a portfolio or add some diversification to a shares focused portfolio.
But investors should note the managers’ investment style means this fund can experience more ups and downs than peers. The fund can also invest in high-yield bonds, emerging markets and use derivatives which can also add risk.
High yield bonds have been the best-performing area of bond markets over the 12 months, which helped the fund perform better than the wider peer group.
Annual percentage growth
31/01/2021 To 31/01/2022 | 31/01/2022 To 31/01/2023 | 31/01/2023 To 31/01/2024 | 31/01/2024 To 31/01/2025 | 31/01/2025 To 31/01/2026 | |
|---|---|---|---|---|---|
Jupiter Strategic Bond Fund | 0.60% | -10.48% | 4.04% | 1.04% | 9.99% |
IA Sterling Strategic Bond | -0.49% | -7.63% | 4.95% | 5.70% | 6.89% |
Legal & General All Stocks Gilt Index
The worst-performing Wealth Shortlist fixed income fund over the last 12 months was the Legal & General All Stocks Gilt Index fund, returning 4.19%*.
The fund offers a simple way to invest in UK government bonds across all maturities. It can help diversify a portfolio focused on shares or other types of investment.
The fund takes charges from capital, which can increase the income paid but reduces capital growth. Also, as the fund only invests in UK gilts, it’s not very diversified. There also aren’t many gilts in issue, making it concentrated, and each investment has a bigger impact on performance.
The fund may invest more than 35% in securities issued or guaranteed by a member state of the European Economic Area or other countries listed in the fund’s prospectus.
Annual percentage growth
31/01/2021 To 31/01/2022 | 31/01/2022 To 31/01/2023 | 31/01/2023 To 31/01/2024 | 31/01/2024 To 31/01/2025 | 31/01/2025 To 31/01/2026 | |
|---|---|---|---|---|---|
Legal & General All Stocks Gilt Index | -6.65% | -18.79% | -1.72% | 0.11% | 4.19% |
IA UK Gilts | -6.81% | -19.59% | -1.71% | 0.10% | 4.10% |