Navigating fixed income: Where to invest as interest rates fall

Brian Erickson, Fixed Income Strategist – Ameriprise Financial 

December 15, 2025

As interest rates drop and the economy shows some signs of strain, many investors are looking for ways to preserve their portfolios while still generating income. Fixed income investments, such as bonds, can provide a reliable source of stability in these uncertain times. 

Here’s why you may want to reevaluate your portfolio’s fixed income allocation and an overview of the opportunities you may want to consider in a falling-rate environment. 

Why invest in fixed income now? 

The Fed has lowered its policy rate by half a percent, with markets expecting more cuts in 2026. This is good news for borrowers, who should benefit from lower financing costs. However, it’s not ideal for savers holding significant cash or floating-rate investments because yields will likely drop with every Fed cut.  

If you’re holding significant amounts of cash for longer-term goals, transitioning those holdings into fixed income can provide two key benefits: 

1. Lock in today’s higher yields before they fall further. 

2. Potential price gains — as rates drop, bond prices can rise. 

For example, 10-year Treasuries are currently yielding about 4.1%, compared to less than 1.0% as recently as 2020, and well above the five-year average of 3.3%, according to Bloomberg. Plus, the Treasury yield curve is steep, which means bonds can gain value as they “roll down” the curve to lower yields over time. 

What should investors consider when choosing fixed income investments? 

It can be helpful to keep these principles in mind as you review your fixed income allocation: 

• Be selective. Credit spreads are tight, so there’s less room for big price jumps from riskier bonds. And if the economy hits a rough patch, lower-quality debt could struggle. That’s why being selective matters. 

• Diversify within your fixed income allocation. Spreading your fixed income investments across Treasuries, investment grade corporates, mortgage-backed securities and municipals can help reduce risk and capture opportunities.  

• Active management can make a big difference. Skilled managers can discern between companies or municipalities that may remain strong from those that may falter. They can also quickly respond to changes in economic, market and policy conditions, and position portfolios to benefit from bonds moving down the yield curve. 

• Consider core bond funds. Even when markets feel calm, active strategies can help you avoid pitfalls and find hidden opportunities. A core bond fund may be a great starting point, giving you exposure to high-quality bonds and professional management. 

Which fixed income investments could benefit from declining policy rates and fixed income yields? 

Recall that for bonds, falling yields equate to higher prices. If interest rates keep trending lower, the following fixed income investments may stand to benefit: 

• U.S. Treasuries are bonds backed by the full faith and credit of the U.S. government. Steady coupon returns may be complemented by modest price returns as declining bond yields generally lead to positive price returns as well. 

• Municipal bonds are issued by states, counties or municipalities. Typically exempt from federal income tax, they can also be exempt from state income tax under certain conditions. Similar to Treasuries, municipal investors may experience favorable return prospects in non-qualified accounts where tax advantages can be meaningful. 

• High-quality corporate bonds are issued by companies with strong financial health. Corporate bonds trade with a spread premium over Treasuries, linking total return performance with Treasury returns when premiums hold steady. 

• Mortgage-backed securities are bonds created from pools of home loans, often with return performance linked to when mortgages are repaid. If Fed cuts filter through to lower mortgage rates, homeowners can refinance higher interest loans at lower rates speeding up how quickly existing loans are repaid. Similarly, lower borrowing costs may entice first time homeowners into purchasing, which results in the repayment of the existing mortgage.  

Bottom line 

With interest rates heading lower, fixed income offers a chance to lock in attractive yields and potentially benefit from price gains. Diversification and active management can help you make the most of these opportunities while managing risk. If you’ve been sitting on cash for long-term goals, now may be the time to put those dollars to work. 

Is it time to reevaluate your fixed income allocation? 

Talk with your Ameriprise financial advisor about the role fixed income should play in your investment portfolio. They can review your asset allocation in light of the new interest rate environment, and help you choose fixed income investments that align to your risk tolerance, time horizon financial goals.