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Economic Trends · Jun 8th, 2026
What this video’s about
In this episode of The Market Share, Paul Gifford, Chief Investment Officer at 1st Source Bank, sits down with Erik Clapsaddle, Senior Fixed Income Portfolio Manager, to discuss a part of the market that has received less attention than stocks this year: fixed income.
While equity markets have captured most of the headlines, bond investors have faced a changing landscape of rising Treasury yields, persistent inflation, and a new Federal Reserve chair. Paul and Erik examine what those developments mean for fixed income investors and explain how the team approaches bond portfolio construction in today’s environment.
Rising rates have created challenges—and opportunities
Interest rates have moved higher throughout 2026. Erik notes that the 10-year Treasury yield has climbed from approximately 4.15 percent at the end of 2025 to nearly 4.5 percent today, while the two-year Treasury yield has risen from the mid-3 percent range to around 4.1 percent.
Several factors are contributing to that increase:
- A resilient economy
- Persistent inflation
- Continued labor market strength
- Ongoing geopolitical uncertainty
Job openings recently reached 7.6 million, the highest level since June 2025, underscoring the economy’s continued strength.
When Treasury yields move higher, other parts of the bond market typically follow. Corporate bonds, municipal bonds, and mortgage-backed securities have all felt the effects of rising rates.
Even so, fixed income investors have continued to see positive returns. Erik explains that strong credit conditions and steady income generation have helped offset modest declines in bond prices. The average yield across client portfolios remains around 5 percent.
A new Fed Chair faces a familiar challenge
One of the year’s biggest developments has been the leadership transition at the Federal Reserve. Following Jerome Powell’s departure as Chair, Kevin Warsh has stepped into the role at a time when inflation remains above the Fed’s 2 percent target.
Warsh also inherits a Federal Reserve that has shown some internal disagreement about the best path forward. While there has been pressure from policymakers to lower rates, inflation concerns continue to complicate that decision.
According to Erik, Warsh strongly favors using the federal funds rate as the Fed’s primary policy tool. Changes to short-term interest rates affect borrowers and savers throughout the economy, making them a broad and effective way to influence economic activity.
Perhaps most surprising is how market expectations have shifted. Just a few months ago, many investors anticipated rate cuts. Today, markets are pricing in the possibility of a quarter-point rate increase over the next 15 months.
Why fixed income still plays an important role
Although bond returns have been more modest this year than last, Erik emphasizes that fixed income remains a critical component of diversified portfolios.
“Fixed income isn’t always fixed,” he explains. Last year’s traditional fixed income allocation generated returns in the mid-to-upper 7 percent range. This year, returns have been closer to 1 percent so far, while continuing to generate roughly a 5 percent income yield.
Rather than focusing on short-term rate movements, the team builds portfolios with a long-term perspective. Current portfolio duration is approximately five years, and with yields near 5 percent, Erik believes fixed income investors can reasonably expect annualized returns near that level over the next five years.
Diversification remains the foundation
Erik explains that building fixed income portfolios involves much more than simply buying bonds. The team evaluates credit quality, portfolio structure, sector allocation, and relative value opportunities before making investment decisions.
That approach helps manage a variety of risks, such as interest rate changes, credit events, inflation pressures, and geopolitical uncertainty. The objective is straightforward: ensure that fixed income continues to serve as a stabilizing force within client portfolios, even when market conditions change.
Conclusion
Rising interest rates, persistent inflation, and a new Federal Reserve chair have created a more challenging environment for bond investors in 2026. Yet strong yields and healthy credit conditions continue to provide opportunities for long-term investors.
As markets evolve, diversification and disciplined portfolio construction remain essential. Fixed income may not always make headlines, but it continues to play a vital role in building resilient portfolios.
Stay informed with The Market Share for practical insights into the trends shaping today’s markets and investment decisions.
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