Bond funds sector review – what are central banks saying about interest rates in 2026?

The Bank of England (BoE), US Federal Reserve (Fed) and European Central Bank (ECB) made no changes to interest rates in July, although the ECB raised them in June. Even so, investors are still weighing up the potential for rate rises this year.

We’re looking at what the banks have been saying and the performance of bonds over the last 12 months.

This article isn’t personal advice. If you’re not sure whether an investment is right for you, ask for financial advice. All investments can fall as well as rise in value, so you could get back less than you invest. Yields are variable and not guaranteed. Past performance isn’t a guide to the future.

What are central banks thinking about rate rises?

In the UK…

It’s realistic to expect that this indeed is the question on most central bankers’ minds right now. At the recent BoE meeting, the rate decision was split 6–3 in favour of no change, with 3 members voting for a rate hike and no one suggesting a cut.

Despite the seeming tilt towards a potential rate rise, market estimates of a hike in their next meeting in September reduced from 50% to 30% after Governor Andrew Bailey’s press conference.

With inflation coming in lower than expected and the UK economy certainly not running hot, the biggest factor affecting future decisions is the ongoing US/Iran conflict with its impact on energy prices.

If the conflict ends soon, hikes become much less likely. But if it continues for an extended period, it’s the reverse. Trying to predict the outcome of these events is not an area of expertise for the BoE.

In Europe…

The ECB gave a similar view after holding rates in July. Although, unlike the UK and US, they did hike by 0.25% in June.

Interestingly, it was widely reported that some members of the ECB had effectively debated whether the actual question was

But ECB President Christine Lagarde was clear that the breakdown of the ceasefire between the US and Iran had led to “serious developments” in commodity markets, a clear nod to potential future inflation implications.

In the US…

Under new Fed Chair Kevin Warsh, the decision was taken to hold rates for now, although similar to the BoE the vote wasn’t unanimous, with a 9–3 split – again, with no votes for a cut.

The bigger issue coming out of the recent Fed meeting and press conference is the commentary being provided by the new Chair, or rather the lack of it.

is very much the debate across the pond. And the new Chair is firmly of the view that the answer is not to guide.

Following his appointment, he’s put a stop to providing forward guidance, including the ‘dot plot’ of potential future interest rates from the members of the committee.

Although the reduced commentary on what the Fed might do in future gives it greater potential to react to the most recent market data at each meeting, potentially giving them greater flexibility, it creates more uncertainty in markets – which is likely to result in more volatility in US Treasury yields and prices.

How have bonds performed in the last 12 months?

Performance has been different for different parts of the bond market.

Higher-risk high yield bonds have provided the highest returns, and UK government bonds have provided the lowest. This is largely because of the higher yields that those bonds offer. Companies with a higher risk of defaulting on their bond payments have to offer higher returns to investors to take that risk, especially compared to the UK government.

The IA £ Strategic Bond sector returns have been in the middle of the range over time, as you’d expect given that funds in that sector can invest in all types of bonds. This highlights the potential benefits of investing in those funds. Although the overall returns might not be 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 during the past year. Some have outperformed their peer group, and others have underperformed.

We wouldn’t expect them all to perform the same, though. If all your funds in a sector are performing well at the same time, they're probably investing in similar areas.

Investing in funds isn't right for everyone. Investors should invest only 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 that 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.