Outlook 2026: Steepening yield curve

Bullish indicator for future growth

As 2025 draws to a close, it is time to turn our attention to 2026 and beyond. Last time, we began our outlook with the first of our three 2026 cyclical themes – broadening, that is, our conviction that investment opportunities across regions and asset classes are expanding. In this article, we’ll turn our attention to the second of our cyclical themes – steepening.

Steepening

Steepening refers to yield curves, where falling short-term interest rates will incentivize investors to move out of cash holdings and into risk assets, including equities, credit and fixed income duration.

In September 2025, the Fed resumed cutting rates, a policy that had been on pause for the preceding nine months. The Fed is expected to continue easing into the first half of 2026, perhaps for longer. It joins other central banks that have already cut rates (e.g., the European Central Bank [ECB]) and those whose rate-cutting cycles are also likely to continue, for example, in many emerging economies.

For the Fed, easing comes at an awkward time, given that its preferred core inflation gauge of personal consumption expenditures (PCE) prices remains stubbornly above target and will tick higher as tariff costs pass-through. Partly for that reason, the U.S. Treasury yield curve is likely to steepen as the Fed cuts short rates, with long rates only grudgingly following.

We think two additional factors will also contribute to steeper yield curves globally.

The first is the tremendous demand for capital to fund surging investment in innovation, above all in AI and the energy infrastructure it requires. In the United States, that investment boom will also be fueled by favorable tax treatment of depreciation.

The second is the arrival of massive new government borrowing in the United States, Germany, much of the European Union, China and perhaps even in Japan.

For investors, steeper yield curves pose both challenges and opportunities.

For investors sitting on large cash balances, falling short-term interest rates pose rollover (or reinvestment) risk, namely the likelihood that income derived from short-term deposits and cash will also fall as short rates decline.

At the same time, gargantuan needs to finance private investment and public borrowing will tend to push up real interest rates, particularly at longer durations and in the credit arena. That creates income opportunities further along the duration and credit curves.

Accordingly, the steepening of yield curves reinforces our previous broadening thesis, as investors will be incentivized to seek new opportunities in duration, credit, equities and elsewhere.

Typically, a steepening of the yield curve is also seen as a bullish indicator for future growth, particularly if it is driven by monetary easing. Other potential beneficiaries of steeper yield curves, therefore, include cyclically sensitive sectors and styles such as industrials, financials, or small-cap firms.

Falling cash yields should also prompt investors to move into alternative assets, including private credit and private real estate, as they seek to boost income and find ways to diversify portfolio holdings.

Next time: The implications of a weakening U.S. dollar.

Stephen Dover, CFA, is Franklin Templeton’s Chief Market Strategist and Head of the Franklin Templeton Investment Institute. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.

Lawrence Hatheway is Global Investment Strategist – Franklin Templeton Institute.

Excerpted from Global Investment Outlook: 2026 and Beyond, Franklin Templeton Institute, originally published on the Franklin Templeton website, Nov. 17, 2025.

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