- High-quality bonds offer a compelling risk-return profile for investors over the next 10 years.
- With credit spreads approaching historical lows, corporate bonds offer limited compensation for the additional risk.
- Bonds provide diversification against the risk that an AI-driven productivity boost is not realised in the years ahead.
Set against a higher neutral rate backdrop, bonds offer a compelling mix of strong yields and diversification.
In 2025, government and corporate bond markets in the US, UK and euro area delivered solid returns1, thanks to strong starting yields and tightening credit spreads. Looking ahead, we think bonds will continue to deliver compelling real returns, exceeding the expected rate of future inflation, no matter what central banks do in 2026.
Focus on quality fixed income
Within fixed income, we stress the importance of quality. Credit spreads have compressed to historically tight levels, and are now approaching the record lows last seen during the technology boom of the 1990s.
While supply/demand mismatches could keep credit spreads compressed, the prospect of further tightening is low. This presents a one-sided risk profile - to the downside, since current valuations offer little room for error and limited compensation for risks associated with the AI investment cycle.2
Record-low credit spreads leave limited room for further tightening
Notes: The chart shows the option adjusted spreads (OAS) for the Bloomberg US Credit Index (green line) and the Bloomberg US High Yield Corporate Bond index (brown line). The dashed lines indicate recent spread values for each index, as at 2 January 2026.
Source: Vanguard and Refinitiv, as at 2 January 2026.
A strong economic environment will likely keep credit spreads tight - both in the US, where we expect growth to accelerate above 2%, and in Europe, where growth is expected to be closer to long-term trends.
AI infrastructure buildout could put pressure on credit markets
As the AI investment cycle continues, bond markets will need to absorb an increasing amount of debt issuance, which could put pressure on spreads to widen. At the same time, current credit valuations offer limited additional compensation over government bonds for the risks associated with this infrastructure buildout. As capital-intensive AI projects proliferate, the potential for credit stress, especially among lower-rated issuers, rises. As a result of these dynamics, we expect global bonds to deliver strong returns in the range of 3.6%-5.1%3 over the next 10 years.
High-quality bonds offer compelling returns for the risk
Notes: Forecasts based on the distribution of 10,000 VCMM simulations for 10-year annualised nominal returns in GBP for the highlighted asset classes. Asset class returns do not take into account management fees, expenses or the effect of taxes. Returns do reflect the reinvestment of income and capital gains. Indices act as proxies for the highlighted asset classes and are unmanaged; therefore, investing directly in the indices is not possible.
Source: Vanguard calculations, as at 31 October 2025.
With credit spreads so tight, we expect broad investment-grade corporate bonds to provide limited excess returns over government bonds with a similar duration profile. Over the next 10 years, we expect US corporate bonds (GBP hedged) to produce annualised returns of 4.0%4, compared with 3.9% for US Treasuries (GBP hedged), both with a duration of around six to seven years.
Bullish on bonds, less so on US stocks
With returns in this range, the case for bonds in investor portfolios remains strong. While we remain constructive on value-oriented US equities and developed-market ex-US equities, we maintain our view that high-quality bonds can improve a portfolio’s risk profile and provide diversification against the material downside risk that an AI-driven productivity boost is not realised or even leads to a pullback in equity markets in 2026 or beyond.
See Vanguard’s range of fixed income funds, ETFs and model portfolios here.
1 Returns for US, UK and European government and corporate bonds hedged to GBP for the period from 31 December 2024 to 31 December 2025 were: US government: 6.2%; US corporate: 7.7%; UK government: 5%; UK corporate: 6.8%; European government: 5.1%; European corporate: 5.1%. Proxies used: Bloomberg US Treasury GBP Hedged; Bloomberg US Credit GBP Hedged; Bloomberg GBP Gilts; Bloomberg GBP Non-Gilts; Bloomberg Euro-Aggregate Treasury GBP Hedged; Bloomberg Euro-Aggregate Corporates GBP Hedged. Source: Refinitiv.
2 As capital-intensive AI projects proliferate, the potential for credit stress rises, especially among lower-rated issuers.
3 Based on Vanguard’s Vanguard’s 10-year annualised return forecast for global aggregate bonds (GBP hedged), as at 31 October 2025.
4 Based on Vanguard’s 10-year annualised return forecast for US corporate bonds (GBP hedged), as at 31 October 2025.
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