Fixed income markets in 2025 tested investors with volatility, policy uncertainty, and elevated Treasury yields in the first half, then rewarded patience with a meaningful rebound in municipal bonds and strong performance across credit sectors in the second half. As we move through 2026, the environment continues to offer real opportunity for investors seeking income, tax efficiency, and portfolio stability. The key is having the right strategy in place.
One Oak Capital Management, LLC, a New York-based SEC-registered investment adviser founded in 2013, has spent over a decade helping investors build fixed income portfolios designed to perform in exactly these conditions. The firm's investment team brings decades of experience across municipal and corporate bond markets, applying active management within a disciplined risk management framework.
Here is what shaped fixed income in 2025 and what you should know heading into 2026.
Despite the challenges, 2025 delivered meaningful opportunities for disciplined fixed income investors, and the setup for 2026 remains favorable.
Municipal bonds staged a notable comeback in the second half of 2025. After posting a slightly negative return through June, the Morningstar US Municipal Bond Index finished 2025 with a gain of 3.94%. The Federal Reserve's September rate cut sparked renewed investor interest, and October 2025 saw the largest monthly inflow into both taxable and tax-exempt fixed income funds since 2021. Full-year fund flows into municipal bonds reached $51 billion, and total new issuance hit a record $580 billion.
Heading into 2026, yields across municipal, corporate, and Treasury bond markets remain above their respective 10-year median values. For investors in higher tax brackets, the tax-equivalent yield on municipal bonds continues to compare favorably to taxable alternatives. The Bloomberg Municipal Bond Index carries a yield-to-worst of approximately 3.6%, which translates to roughly 6.1% on a tax-equivalent basis for investors in the top federal bracket (37% plus the 3.8% Net Investment Income Tax).
The longer end of the municipal yield curve presents a particularly compelling opportunity in 2026. The spread between intermediate and long-term muni yields widened during 2025, and the curve beyond 10-year maturities offers the greatest yield pickup to 20-year bonds recorded in the past decade. Several major asset managers recommend overweighting longer maturities in tax-exempt portfolios for 2026, citing attractive roll-down return potential as bonds move toward maturity along a historically steep curve.
Credit-sensitive sectors outperformed interest-rate-sensitive ones during 2025. Investment-grade corporate bonds finished up 7.56%, while Treasuries gained 6.17%. Municipal credit quality remained strong, with rating upgrades outpacing downgrades by 1.9x in par amount during 2025, and defaults tracking well below 2024 levels. For 2026, credit fundamentals remain supported by a resilient economy, strong balance sheets, and manageable debt maturities.
Elevated yields come with real risks, and 2026 brings its own set of concerns.
Inflation remains the primary risk. While the Federal Reserve has been cutting rates, inflation has not yet returned to the 2% target. Structural factors, including higher tariffs and supply chain shifts, may prevent inflation from reaching pre-pandemic levels. If inflation proves more persistent than expected, it would limit the Fed's ability to continue easing and could push long-term yields higher.
Interest rate risk is another factor. The 30-year Treasury yield hit nearly 5.10% in May 2025 before pulling back modestly. Long-term yields stayed well above 2024 levels through year-end, reflecting investor concern about the long-term economic outlook and growing federal debt. Rising deficits in major developed economies have tested investor confidence and could trigger bouts of volatility in 2026.
Credit risk also deserves attention. While corporate default rates remained low in 2025 and are expected to stay stable in 2026, credit spreads sit near multi-decade tights. That leaves limited room for further spread compression and exposes investors to potential widening if economic conditions deteriorate. The credit cycle is maturing, and security selection becomes more important in this environment.
For municipal bond investors specifically, state fiscal reserves are projected to decline for a third consecutive year in fiscal year 2026, from 26.5% to 21.4%. While reserves remain above pre-pandemic levels and state spending plans reflect caution, the trend warrants monitoring. Certain sectors, including higher education, tobacco, and some regional hospitals, face particular pressure and may experience credit deterioration.
Municipal bond issuance is expected to remain elevated in 2026, with many forecasters calling for another record year driven by costly infrastructure projects. If supply outpaces demand, it could put pressure on prices and create temporary volatility, though it may also create buying opportunities for active managers.
One Oak Capital Management, LLC positions its SMA strategies to address both the opportunities and risks present in today's market. The firm's approach centers on active management, rigorous credit research, and defined risk controls.
Stephen DiTursi, CEO and Chief Investment Officer with 40 years of industry experience, leads portfolio risk management across the firm. Neil Crabb, Senior Portfolio Manager with 34 years of experience, oversees the municipal research process and trading systems. The team uses Bloomberg, Fabkom, and research from multiple sell-side firms to identify value opportunities within U.S. municipal and corporate bond markets while managing interest rate and credit risk.
The firm's Enhanced Municipal Portfolio is a laddered, actively managed strategy that focuses on high credit quality, investment-grade municipal bonds designed for investors seeking tax-advantaged income. The strategy earned a 5-star Morningstar Rating and received Zephyr's PSN Top Gun award for achieving a Top 10 return for the three-year and five-year periods ending September 30, 2025, in the PSN Municipal Universe.
(Disclaimer: References made to awards/rankings are not an endorsement by any third party to invest with One Oak and are not indicative of future performance. Investors should not rely on awards/rankings for any purpose and should conduct their own review prior to investing. Zephyr/PSN is an asset and wealth management software marketed by Informa (LSE: INF). PSN is a database of Separately Managed Accounts managed by Zephyr. One Oak does not compensate Zephyr for inclusion in the PSN database, nor does it compensate Zephyr for consideration for, or awarding of, the PSN Top Gun designation. The Morningstar Rating for Funds, often called the Star Rating, is a data-driven rating that measures the past performance of a fund in comparison to peers. One Oak has purchased the Morningstar Basics Package, which grants One Oak the permission to feature its Morningstar Rating in marketing materials. This purchase, renewed on an annual basis, has a value of $6,885.06.)
The Enhanced Taxable Municipal Portfolio combines municipal bonds with corporate bond exposure for investors seeking attractive taxable income and total return. This strategy also received multiple PSN Top Gun awards for the one-year and three-year periods ending September 30, 2025, in the PSN Municipal Universe, as well as for the three-year period in the PSN Intermediate Maturity Universe and the five-year period in the PSN US Fixed Income Universe.
(Disclaimer: References made to awards/rankings are not an endorsement by any third party to invest with One Oak and are not indicative of future performance. Investors should not rely on awards/rankings for any purpose and should conduct their own review prior to investing. Zephyr/PSN is an asset and wealth management software marketed by Informa (LSE: INF). PSN is a database of Separately Managed Accounts managed by Zephyr. One Oak does not compensate Zephyr for inclusion in the PSN database, nor does it compensate Zephyr for consideration for, or awarding of, the PSN Top Gun designation.)
For investors with shorter time horizons or a preference for lower volatility, the firm's Enhanced Short-Duration Municipal Portfolio offers a laddered approach using short-duration, high credit quality bonds designed for total return and tax-advantaged income.
Given today's conditions, several types of fixed income products stand out to us for the year ahead.
Investment-grade municipal bonds remain attractive for investors in higher tax brackets. The preservation of the tax exemption, combined with yields near historical highs and strong credit fundamentals, supports the case for maintaining or increasing municipal bond allocations. Active management matters here. The municipal market has over 1.5 million CUSIPs and more than 50,000 issuers, yet only about 1% trade on any given day. That fragmentation and illiquidity create pricing inefficiencies that skilled managers can capture.
Short-duration strategies offer a compelling option for investors who want to limit interest rate exposure while still earning meaningful income. With the Fed expected to continue easing in 2026, short-term yields tied closely to the federal funds rate may move lower, but short-duration portfolios can still provide a balance of income and capital preservation.
Taxable municipal and corporate bond allocations may make sense for investors in tax-advantaged accounts or those seeking higher absolute yields. Corporate bond net supply is expected to increase significantly in 2026, driven by AI-related capital expenditures. Strong investor demand should persist with yields near 5%.
For investors seeking returns that are less correlated to broader bond market movements, relative value strategies within the municipal space can provide diversification — a benefit that may be especially valuable amid elevated equity market levels.
You can learn more about how One Oak Capital Management, LLC builds fixed income portfolios for different investor objectives by visiting the firm's website or reaching out through the contact page.
Past performance is not representative of future results. All investing involves risk, including possible loss of principal. Fixed income risks include but are not limited to changes in interest rates, liquidity, credit quality, volatility, and duration. Tax-exempt income may be subject to the alternative minimum tax or state and local taxes. Consult your financial and tax advisors before making investment decisions.
