If 2025 will be remembered as the year South African fixed income delivered exceptional returns through a dramatic repricing of risk, 2026 is shaping up to be the year of structural resilience and income consolidation.

After a period where local income funds delivered double-digit returns, outperforming benchmarks and standing tall globally, investors are rightly asking: what comes next?

While it is tempting to extrapolate the aggressive capital gains of the past 12 months into 2026, a prudent outlook requires a shift in mindset. The “easy money” generated by the unwinding of extreme pessimism has largely been made. Now, we enter a phase driven by fundamental stability, attractive real yields, and the compounding power of “carry” – the return you earn by holding an income-producing asset and collecting its interest over time.

The shift from valuation correction to income generation

The 2025 rally was rooted in a valuation correction. For too long, South African assets traded at deep discounts due to political anxiety and fiscal opacity. As the government of national unity stabilised and fiscal consolidation took hold, that risk premium dissipated, driving bond prices up and yields down.

Heading further into 2026, the driver of returns will shift. We do not expect the same magnitude of yield compression (and subsequent capital gains) as seen last year. Instead, returns will be driven by the high-income yield that South African bonds still offer relative to developed markets. Even with the recent rally, our real yields remain among the most attractive relative to those in the investment-grade universe.

Policy credibility as an anchor

The macroeconomic backdrop for 2026 is markedly different from the volatility of previous years. Two key pillars will likely reduce volatility and support the bond market this year:

The 3% inflation anchor: The formal adoption of a lower inflation target has been digested by the market. With inflation contained, the South African Reserve Bank has room to maintain a supportive, albeit cautious, monetary policy. This lowers the cost of capital and protects the real value of fixed-income returns.
The structural reform dividend: The removal from the Financial Action Task Force greylist and the sovereign credit rating upgrade by S&P Global Ratings were not just headlines, they were signals of structural repair. In 2026, we expect to see the “dividend” of these reforms in the form of sustained foreign interest. National Treasury data indicating offshore holdings of South African government bonds rising above 31% is a trend we expect to stabilise, providing a technical floor for local bond prices.

Scarcity in credit markets

A defining feature for the year ahead will be the dynamics of the local credit market. Demand for high-quality credit continues to outstrip supply. Issuance remains dominated by banks, with corporate supply limited and often skewed towards private placements.

For active managers, this presents both a challenge and an opportunity. In 2026, simple passive exposure may struggle to capture value. The ability to source credit, analyse private placements, and manage liquidity will be the key differentiator between average and superior performance. We anticipate modest spread compression to continue, favouring actively managed portfolios.

Navigating the ‘new normal’

For investors, the outlook is constructive, but patience is required.

Bonds three-year rolling. — The SIM SCI Enhanced Yield Fund posted a three-year annualised return of 10.21% after fees through 2025, compared with its benchmark, STeFI + 0.5%, which returned 8.51%.

The double-digit outcomes of 2025 were the reward for those who looked through the noise when fear was at its peak.

While the sun may not shine quite as brightly as it did during the peak of the rally, the clouds have parted. For conservative investors seeking real returns, the fundamental case for South African fixed income remains compelling. The era of extreme volatility appears to be receding, replaced by a period where fundamental value and active management will dictate the winners.

Melville du Plessis is a portfolio manager at Sanlam Investments with more than two decades of experience as a portfolio manager and analyst.