Back to News
Economic Trends · Dec 9th, 2025
What this video’s about
In the second video of our three-part 2026 investment outlook series, Paul Gifford, Chief Investment Officer at 1st Source Bank, meets with Erik Clapsaddle, Senior Fixed Income Portfolio Manager, to explore what the Federal Reserve (the Fed), interest rates, and the manufacturing landscape mean for fixed income investors heading into 2026.
How will falling rates, persistent inflation, and a shifting labor market shape opportunities in bonds and income-focused portfolios? Paul and Erik break it down.
The Federal Reserve is easing cautiously
The Fed has cut rates in each of its last two meetings, and Erik notes a high probability of another cut soon. Their outlook calls for:
- Roughly 0.25 percent more in total rate reductions
- A federal funds rate settling in the low 3 percent range by the end of 2026
Even with those moves, inflation remains above the Fed’s 2 percent target. Wage pressure and a firm labor market continue to support prices, although the short end of the yield curve is clearly trending lower.
For fixed income investors, that shift opens the door to new opportunities.
Fixed income stands on solid ground heading into 2026
Erik’s outlook is constructive. Real yields remain attractive, and declining short-term rates support a more favorable environment for bond investors.
Our approach centers on high-quality income and thoughtful diversification:
- Investment-grade corporate bonds
- Municipal bonds
- Mortgage-backed securities
- Selective satellite assets, including high yield bonds and bank loans
This mix provides meaningful income potential while helping manage risk. As the rate environment evolves, these building blocks are positioned to deliver a better risk-adjusted experience through 2026.
Manufacturing contraction may set the stage for recovery
Manufacturing activity has contracted in 34 of the last 36 months. While that signals ongoing weakness, Erik highlights encouraging signs beneath the surface.
Two forces are reshaping the sector:
- Automation – Companies are investing in advanced technology that improves productivity and reduces long-term operating costs.
- Onshoring – More production is moving back into the U.S., strengthening domestic supply chains.
At the same time, skilled trades are experiencing real momentum. Nearly one million openings exist in fields such as HVAC, electrical work, plumbing, and welding. These careers offer stability, strong earnings potential, and the independence many workers are seeking.
Together, these shifts suggest the sector may be poised for improvement once demand begins to recover.
Conclusion
Rate cuts, strong real yields, and a manufacturing sector preparing for renewal are shaping a positive setup for fixed income investors. Thoughtful allocation across high-quality bonds, municipals, and select satellite assets can create a balanced and resilient approach for the years ahead.
Stay informed as the 2026 outlook unfolds. Subscribe to The Market Share for clear, timely insights that help you understand how shifting conditions can shape your portfolio.
Not Insured by FDIC or Any Other Government Agency, Not a deposit or other obligation of, or guaranteed by, the Bank or any bank affiliate, May Lose Value