Top Bond Funds 3Q26: Yields Bite, but China Bonds Hold Firm

• US Treasury yields jumped as the Fed resumed hiking amid energy-driven inflation, weighing on most bond segments.

• China bond funds took five of the top ten spots, supported by subdued inflation and falling Chinese government bond yields.

• Global multi-sector income and EM debt funds lagged, with currency and hedging costs deepening losses in CHF and EUR share classes.

• We prefer high-quality bonds with short-to-medium duration in 4Q26, as higher starting yields provide a cushion against further rate volatility. 

Market Recap: Rising Inflation and Fed Rate Hikes Push Treasury Yields Higher

Global bond markets faced a challenging 3Q26, as persistent inflation, resilient economic activity and heavy debt issuance pushed government bond yields higher.

Competition for investors’ capital intensified. Governments continued to borrow heavily, and many AI companies issued debt this year to fund their expansion. With more debt competing for demand, issuers had to offer higher yields to attract buyers.

At the same time, elevated energy prices amid the ongoing US–Iran conflict added to inflationary pressures, pushing major central banks back into tightening mode. In September, the US Federal Reserve (Fed) raised its policy rate by 25 basis points (bps) to 3.75%–4.00%, its first hike since 2023, with its updated projections pointing to the possibility of further tightening before year-end. The European Central Bank (ECB) raised its deposit rate by 25 bps to 2.50%, its second hike this year, and the Bank of Japan (BoJ) lifted its policy rate to 1.25%. Meanwhile, the Bank of England (BoE) held rates at 3.75%, although three of its nine policymakers voted for a hike.

Against this backdrop, US Treasury (UST) yields rose sharply across the curve. As shown in Figure 1, the 10-year yield climbed 82 bps from 4.47% at end-June to 5.29% at end-September, its highest level since 2007. The 2-year yield rose around 70 bps to 4.88%, while the 30-year yield reached about 5.64%.

Figure 1: US Treasury Yields Reach Multi-Year Highs as of end-September 2026

Longer-duration bonds, whose prices are more sensitive to interest-rate movements, bore the brunt of the selloff. Global investment-grade (IG) bonds were the weakest segment in 9M26 (-3.0%), followed by EM hard-currency bonds (−2.3%), Global high-yield (HY) bonds (−1.7%) and Asia IG bonds (−1.4%). EM government bonds also slipped to -0.5%, leaving Asia HY as the only segment in positive territory (+2.8%), supported by its higher carry (see Figure 2).

Figure 2: Bond Market Performance in 9M2026 (%)

Top-Performing Bond Funds in 3Q2026: China Bonds Lead the Way

China bonds were the clear winners, taking five of the top ten spots (Table 1). The Ninety One Global Strategy Fund - All China Bond A Inc-3 SGD-H, HGIF - RMB Fixed Income AM3O SGD, Fidelity China RMB Bond A-ACC-USD, Blackrock China Bond A6 AUD-H and Blackrock China Onshore Bond A2 CNH returned between 0.4% and 1.8%.

While yields rose in most major markets, China’s 10-year government bond yield edged lower by around 5 bps to 1.67%. Unlike the US, where persistent inflation prompted monetary tightening, China's consumer inflation remained subdued at 0.9% YoY in September. Coupled with weak domestic demand, this supported expectations of further policy easing and provided a favourable backdrop for Chinese bonds.

China-focused funds also delivered relatively consistent returns this year, gaining between 3.7% and 7.9% year-to-date. Their performance highlights the potential diversification benefits of investing across markets with different interest-rate environments.

Some Asian bond funds rebounded after a weak first half. The FTIF - Templeton Asian Bond A (Mdis) SGD-H1 was the quarter’s top performer (+2.6%), and the FTGF Western Asset Asian Opportunities A Mdis SGD-H Plus (+0.7%) also made the list. However, their gains were not shared across Asian bonds. USD-denominated Asian credit funds such as the AB FCP I American Income Portfolio A USD, Fidelity Asian Bond A-MDIST-USD and United Asian Bond Fund USD fell between 3% and 4% in the quarter. These funds have the flexibility to invest in Asian local-currency government bonds and actively manage their currency exposures, allowing them to diversify beyond USD-denominated debt. Their portfolio positioning may have helped cushion the impact of rising US Treasury yields. However, both remain in negative territory year-to-date, having fallen around 4% to 5% in 1H2026.

Floating-rate funds also proved relatively resilient, as their coupons periodically reset based on prevailing reference rates, helping cushion the impact of rising interest rates. The Franklin Floating Rate A (dis) SGD-H1 (+0.9%) and M&G (Lux) Global Floating Rate High Yield A Inc SGD-H (+0.5%) made the list through their SGD-hedged share classes. Even their USD share classes were roughly flat, compared with declines of around 3% for most US high-yield funds.

Rounding out the top ten was the FTIF - Templeton Global Total Return A (Mdis) SGD-H1 (+0.7%). The fund was roughly flat in its USD share class (0.0%) during a quarter when most global bond funds fell, reflecting its flexible, unconstrained approach, which allows its duration and currency positioning to differ significantly from the broader bond market.

Table 1: Top 10 Best-Performing Bond Funds in 3Q2026

Bottom-Performing Bond Funds in 3Q2026: Duration and Currency Weigh on Returns

As seen in Table 2, the weakest performers were concentrated in global multi-sector income and EM debt funds. Both were hit by the sharp rise in government bond yields, and currency effects deepened their losses in SGD terms. Most of the damage came in 3Q26 itself: for all ten funds, the quarter’s decline accounts for the bulk of their losses this year.

The M&G (Lux) Optimal Income A M F1 Inc CHF-H, PIMCO Income Fund CI E Inc CHF-H, Capital Group Multi-Sector Income (LUX) Bdmh (Inc) CHF and Schroder ISF Global Credit Income A Dis CHF-H were the four worst performers, with their CHF-hedged share classes falling between 8.4% and 10.0% in 3Q2026, and 10.2% to 11.7% year-to-date. These funds invest across government bonds, corporate credit and securitised debt, but their portfolios are mainly fixed rate, leaving them exposed when yields rose sharply. Even in their USD share classes, they fell between 4.3% and 6.0%.

EM debt funds also struggled. The BNP Paribas Emerging Bond Opportunities RH EUR, Amundi Funds Emerging Markets Hard Currency Bond A2 (C) EUR and GS Funds III - Emerging Markets Debt (Hard Currency) X Cap EUR-H declined between 6.4% and 7.0% in their EUR share classes, as the rise in UST yields weighed on EM bond prices. Their EUR share classes were roughly flat in 1H2026, so almost all their losses this year came in the third quarter.

The remaining spots went to the Allianz US High Yield Cl AM Dis H2-CAD (−7.5%), PIMCO Total Return Bond Fund Cl E Acc EUR-H (−6.8%) and T. Rowe Price Funds SICAV - Diversified Income Bond Axn CHF (−6.8%). The PIMCO and T. Rowe Price funds, a core US bond fund and a global multi-sector fund, were hit by the same combination of rising yields and weaker currencies through their EUR- and CHF-hedged share classes.

Table 2: Top 10 Worst-Performing Bond Funds in 3Q2026

Currency & Share Class Selection Still Important

Currency and share-class selection also played an important role in 3Q2026. All ten of the bottom-performing share classes were denominated in or hedged to CHF, EUR or CAD.

The Swiss franc depreciated by approximately 3.3% against the USD and 4.5% against the SGD during the quarter, creating a potential currency headwind for SGD-based investors holding CHF-denominated investments. Meanwhile, differences in hedging arrangements and interest-rate differentials also influenced share-class returns.

For instance, the M&G Optimal Income Fund's CHF-hedged share class declined 10.0%, compared with a 5.4% loss for its SGD-hedged counterpart. Although both share classes invest in the same underlying portfolio, currency exposure and hedging arrangements can result in significantly different outcomes for investors.

4Q2026 Outlook: Higher Yields Create Opportunities, but Risks Remain

Looking ahead, we expect bond markets to remain volatile in 4Q2026 as persistent inflation and the possibility of further monetary tightening continue to influence Treasury yields.

US headline inflation accelerated to 3.7% YoY in September, from 3.4% in August, remaining well above the Fed's 2% target. This has raised expectations of additional interest-rate hikes, with the Fed's next policy meeting scheduled for 27–28 October 2026.

Should inflation remain elevated, further monetary tightening could keep government bond yields under upward pressure, potentially resulting in additional mark-to-market losses for longer-duration bond funds.

Nevertheless, higher starting yields have also improved the income potential of fixed-income investments. Investors purchasing bonds at current yields can earn higher carry, which provides a greater cushion against future price declines.

In this environment, we generally favour high-quality bonds with short-to-medium duration, particularly within the SGD and USD bond markets. These strategies allow investors to earn attractive income while limiting their sensitivity to further increases in interest rates. Additionally, we continue to prefer issuers with strong credit fundamentals, where investors can earn carry without taking on excessive credit risk.

We highlight several funds to consider below, with investment-grade average credit quality and varying duration profiles to suit different risk appetites.

Table 3: Funds to Consider