Top Bond Funds 1H26: Duration was no free lunch, but carry helped meaningfully

• Carry supported 1H26 bond fund returns despite higher US Treasury yields.
• Convertibles led performance, while EM debt and Asia High Yield bonds benefited from carry and spread resilience.
• Asian local-currency bonds (including India bonds) lagged as yields rose and regional FX weakened.
• We prefer short-to-intermediate duration and high-quality carry into 2H26. With the global rate hike cycle still intact and spreads still at historical tights, carry will likely continue to be the main driver of performance in 2H26.

Fixed income markets delivered mostly positive returns in 1H26, as markets shifted from a 1Q inflation-driven decline to a 2Q recovery (Chart 1). Higher beta segments like emerging market (EM) hard currency debt (+2.9%) and Asia High Yield (HY) (+2.4%) led performance, supported by high levels of carry. By contrast, Global investment-grade (IG) bonds lagged behind (-0.3%) as US Treasury (UST) yields trended higher over 6 months, while spreads remained at historical tights.

(Figures above in USD terms)

The UST curve shifted higher in a bear-flattening move, with the largest increases observed in the front-to-intermediate part of the curve (1-year to 10-year tenors) (Chart 2). The recent Middle East conflict has led to a resurgence in US inflation, which prompted markets to rescind their expectations for Fed cuts in 2026; at the time of writing, markets are pricing in about 1 hike by end-2026.

Despite higher UST benchmark yields, elevated all-in yields (carry) coupled with resilient spreads helped fixed income returns stay broadly positive. We look deeper into the top and bottom-performing funds of 2Q26 and 1H26 below, and conclude with our thoughts on the outlook for bond markets ahead.

Chart 1: Bond market recap in 1H26 – mostly positive returns except for Global IG

Chart 2: UST yield curve bear-flattened in 1H26

Top-performing bond funds in 2Q26 & 1H26

(Returns below for top and bottom performers are in SGD terms.)

We list the top-performing funds in Table 1 for 1H26 and Table 2 for 2Q26.

The strongest fixed income returns in 1H26 came from higher-beta segments, led by convertibles, EM debt, and Asia High Yield. Convertibles stood out as the Franklin Global Convertible Securities Fund returned +16% in 2Q26 and +13% in 1H26, making it the top-performing fund in both periods. Some of its latest disclosed top holdings had meaningful equity-linked upside during the period (e.g. Macom Technology Solutions, MKS Inc, and Datadog), which likely contributed to this fund’s outperformance. The BNP Paribas Europe Convertible Fund did well in 2Q26 too (+8%), likely also benefiting from the broad-based market rally.

(Note: Convertibles are bonds with embedded equity-conversion features, so they tend to perform well when the underlying equity/stock rallies).

EM debt was the main fixed income winner in 1H26, supported by carry after a 1Q selloff. Lower oil prices toward end-1H26, stronger risk appetite, and carry from all-in yields all helped the segment recover. The 1H26 leaderboard was more skewed toward hard-currency EM debt, in line with the broader market theme of hard-currency outperforming local-currency EM debt observed in Chart 1. More importantly, idiosyncratic issuer selection appeared to play a major role, with many of the top-performing funds appearing to have larger exposures to EMEA rather than Asia.

The abrdn Frontier Markets Bond Fund was on our list of top 10 performers again (for 2Q26 and 1H26), continuing a strong performance from 2025 (+17%). This fund focuses on frontier markets, which are typically developing economies with smaller and less liquid capital markets than mainstream EM debt markets. As such, credit and issuer selection are even more important, and Aberdeen has built long-term expertise in this space spanning more than 10 years.

Related article: Q&A Series: Unlocking opportunities in Frontier Markets bonds

Asia High Yield performed well too in 1H26, as carry remained high (versus many other bond segments) while spreads did not widen meaningfully. With the sector now more diversified and less reliant on Chinese property compared to 5 years ago, defaults have also stabilised. These funds did not see the same sharp rebound in 2Q26 as EM debt, but higher coupons and carry helped compound returns over the full half-year.

Table 1: Top-performing funds in 1H26

Table 2: Top-performing funds in 2Q26

Bottom-performing bond funds in 2Q26 & 1H26

The weakest performers were concentrated in Asian local-currency bonds and India bonds. These did not benefit from the broad-based 2Q rally across EM debt; instead, they were hurt by higher Asian government bond yields and weaker regional currencies.

Indonesia and Korea were key examples of this rates-and-FX drag. In Indonesia, the rupiah weakened by around -7% against the USD, while 10-year government yields rose by around +108 bps in 1H26, as investors grew concerned over higher oil prices, foreign outflows and fiscal pressures. In Korea, the won weakened by around -7% against the USD, while 10-year government yields rose by around +72 bps, as higher oil prices added to inflation pressure and put pressure on the Bank of Korea to tighten policy. The Philippine peso and Thai baht both saw sizeable declines against the USD in 1H26, too.

India bond funds also appeared twice in the list of 1H26 bottom performers. The reasons were similar to the broader Asian local-currency space. India is a large energy importer – higher oil prices put pressure on inflation and its current account, and consequently the Indian rupee. In 1H26, the Indian rupee depreciated by around -5% against the USD.

Notably, the losses appeared to be more of a 1Q issue (rather than a 2Q collapse). 2Q26 returns were generally decent across the board, with the worst-performing fund falling only -1.0%. 5 of the 10 bottom-performing 1H26 funds were also in the 2Q26 list.

Table 3: Bottom-performing funds in 1H26

Table 4: Bottom-performing funds in 2Q26

Currency & share class selection still important

Currency and share-class selection remained important in 1H26, especially for fixed income funds. Fund returns can differ meaningfully across different currency classes even when the underlying portfolio is similar.

The USD generally did well in 1H26 (US Dollar [DXY] Index +3%), which supported funds with unhedged USD exposure (including hard-currency EM debt) – this was clearly reflected in the lists of top performers. AUD-hedged share classes were also well-represented, helped by the +4% appreciation of the AUD against the USD. Few other currencies outperformed the USD but were not directly represented, including the CNY (+3%).

Conversely, weak Asian currencies weighed on several local-currency bond funds, especially where the underlying portfolio retained unhedged regional FX exposure. We also observed JPY-H, CAD-H, and EUR-H share classes in Tables 3 and 4, reflecting their -4%, -3%, and -3% depreciations against the USD, respectively. Finally, there were a number of SGD-H share classes in the list; while the SGD did not depreciate much against the USD in 1H26 (-0.7%), negative hedging costs could have weighed on overall fund performance – these could have pushed a fund with an already-weak performance into the bottom-10 list.

Final thoughts

Looking ahead to 2H26, we still see multiple opportunities within the fixed income segment. All-in yields remain elevated across most segments, which can buffer returns even amid market volatility. However, the prospect of higher global interest rates, coupled with already-tight credit spreads, means that investors should not rely on significant duration gains and/or spread compression to drive returns.

Taking these together, we think the strategy of earning carry through high-quality credits (aided by credit selection) should continue to generate decent income for investors as we head into 2H26. The 2Q26 bottom-performing funds table is a useful reminder: even the weakest fund fell less than 1% during the quarter, showing how carry can cushion returns when markets stabilise.

On the Fed, we continue to lean toward rate hikes, though the eventual policy rate path will depend heavily on incoming data, especially with the Fed under new Chairman Warsh. Globally, the rate hike trend remains very much intact (but with some policy divergence), and we are already seeing hikes across different central banks.

In this environment, we generally recommend short to medium-duration bonds within the USD and SGD bond markets. These strategies offer decent all-in yields without significant duration risk, meaning investors are not overly exposed to another move higher in UST yields. Similarly, we continue to prefer high-quality issuers, where investors can earn carry without bearing significant credit risk. We list some funds to consider below – all with investment-grade average credit quality and relatively controlled duration profiles (Table 5).

Chart 5: Funds to consider – all IG average, with short-medium duration profiles

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold NIL positions in the abovementioned securities. This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.