After years in which bonds offered limited yield and cash looked unusually competitive, investors now have more options to earn income while taking measured fixed income risk.
The “Income” Opportunities in Fixed Income are Expanding
The first quarter of 2026 brought many interesting developments for bond investors. Renewed inflation concerns pushed yields higher, reversing early gains and leaving the Bloomberg U.S. Aggregate Bond Index slightly negative for the quarter. At the same time, expectations for Federal Reserve rate cuts shifted meaningfully, with the probability of a cut falling to roughly 37%, down from 72% at the end of 2025.
Taken together, these developments drove a notable move in Treasury yields. The 10-year yield rose as high as 4.44% before ending March at 4.32%, while the 2-year climbed to 4.00% before settling near 3.80%.1 Short-term yields rose faster than long-term yields, flattening the curve modestly, though it remains slightly upward sloping (in the chart below, data points above 0 represent an upward sloping yield curve).
The 3-month / 10-year U.S. Treasury Bond Yield Curve
While many investors remain focused on stocks or parked in cash, a major change is unfolding in the bond market.
Our latest Stock Market Outlook Report 3 highlights how rising yields and a shifting Fed outlook are reshaping the opportunity set, and what investors may want to consider next. Inside, you’ll find:
Asset allocation guidelines for today’s market environment
Expert forecasts for inflation, rates, and economic trends
Industry tables and rankings to help you spot opportunities
Buy-side and sell-side consensus insights at a glance
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If you have $500,000 or more to invest, claim your complimentary copy of the report and see how shifting market trends could influence opportunities in the months ahead.
While rising yields pressured bond prices, they also improved something largely missing from fixed income for much of the past decade: income.
Today’s yields are meaningfully higher than in the post-2010 period, and a larger share of expected returns is now coming from income rather than price appreciation. That shift suggests bonds may once again serve a more traditional role in portfolios, not only as an instrument for reducing overall volatility but also as a source of steady cash flow.
In my view, this means investors who have been content with cash (money market) returns in past years may want to give the bond market a closer look. In 2025, broad fixed income returned roughly 7.3%, compared to about 4.3% for cash, marking the first time in several years that bonds meaningfully outperformed.4 This outperformance reflects both higher starting yields and a gradual steepening in the yield curve, where extending beyond cash is once again being rewarded.
The macro backdrop also appears to be evolving in a way that could support the income story. While headline inflation has moved higher, much of the pressure has been driven by energy prices. Beneath the surface, core inflation remains more contained (2.6% in March), and longer-term expectations have stayed relatively anchored. Meanwhile, we know the labor market is the weak link in the Fed’s inflation/labor mandate. The unemployment rate has risen to approximately 4.3% as of March 2026, up from a 3.4% low in 2023, with hiring trends becoming increasingly uneven. March payrolls rose by +178,000, but in February was revised to -133,000, underscoring volatility in the data.5 If we look more broadly at annual monthly job gains, we can see a stark and steady weakening pattern, which I have argued before likely means a bias towards more cuts in 2026.
For bond investors, this combination is important. Stable underlying inflation helps preserve the real value of income, while signs of a cooling labor market, I think, rule out the possibility of further policy tightening. In practical terms, that means less upward pressure on yields and a more supportive backdrop for bond prices.
Finally, a quick note on the municipal bond market outlook from here. Rising Treasury yields have pushed municipal yields higher as well, improving their relative attractiveness, particularly for investors in higher tax brackets. The yield curve remains slightly upward sloping, and while valuations have not changed dramatically, income levels are more compelling than they were just a few years ago. At the same time, fiscal conditions for state and local governments remain stable, supporting the overall credit backdrop. As a result, municipals continue to serve as a useful tool for tax-efficient income within a diversified fixed income allocation.
Bottom Line for Investors
After years when cash looked unusually competitive and bonds offered limited yield, investors now have more ways to be compensated for taking measured fixed income risk. For investors with cash that is not needed in the near term, but that you still want to treat conservatively, this may be an opportunity to reassess whether staying on the sidelines still offers the best risk/reward tradeoff. Because today’s fixed market offers income that can contribute meaningfully to total return while still playing a stabilizing role in portfolios.
If you’re still thinking about markets the same way you did a year ago, you may be missing what’s changed.
Get our latest Stock Market Outlook Report 6 to see where the real opportunities may be developing, and how to position for them now.
The report includes:
Asset allocation guidelines for today’s market environment
Expert forecasts for inflation, rates, and economic trends
Industry tables and rankings to help you spot opportunities
Buy-side and sell-side consensus insights at a glance
And much more!
If you have $500,000 or more to invest, claim your complimentary copy of the report and see how shifting market trends could influence opportunities in the months ahead.
About Zacks Investment Management
Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we’ve developed to design customized investment portfolios based on each client’s individual needs. The end result is investment management that is research driven, results oriented and client focused.
3 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.
6 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.
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