Income investors will continue to enjoy high yields in the second half of 2026 amid the uncertainty around potential Federal Reserve monetary policy, according to Sonal Desai, chief investment officer at Franklin Templeton Fixed Income. On Wednesday, the central bank released the minutes of its June meeting , where it held rates steady and indicated possible hikes ahead due to above target inflation . Meanwhile, Treasury yields remain high , with rising oil prices pushing the benchmark 10-year to 4.59% on Wednesday. “For an income-focused investor, all-in yields are actually quite attractive, whether we’re looking at high yield or we are looking at investment grade,” Desai said in an interview with CNBC. While credit spreads are still tight, the economy remains in good shape and fundamentals are strong, she noted. “Without a recession, I actually have difficulty seeing a massive pickup in default rates, which is what you have to try and compensate for, because your spread essentially has to capture the fact that your return may need to account for losses,” Desai said. Earlier this week, Franklin Templeton Institute released its mid-year outlook, which said the fixed income landscape has shifted, as earlier expectations for a series of Fed rate cuts have given way to potential rate hikes. As a result, yield curves are in a period of “bear flattening,” which sees short-term yields rise more rapidly than long-term yields, the outlook said. Income opportunities In this environment, Desai sees opportunities across several asset classes, including high-yield bonds and structured credit. The focus should be on income rather than capital appreciation, she said. “I would recommend strongly that people do not buy the index in high yield, or indeed in any credit sector,” she said. “The way we manage our active high yield is, we don’t go sector by sector, we do bottom up research.” The Franklin High Income Fund is the firm’s high-yield bond fund. Its A shares, available to retail investors, are rated four stars by Morningstar and ranked in the top quartile for 2025. However, it is in the bottom quartile year to date, according to Morningstar. The fund has a 30-day SEC subsidized yield of 5.72% and 0.84% net expense ratio. FHQRX YTD mountain Franklin High Income Fund year to date Bottom-up research also matters to Desai for structured credit, which includes asset-backed securities, mortgage-backed securities and collateralized loan obligations. For investors, that means finding a well-managed active fund. In addition, Desai sees opportunity in carefully selected private credit, which has been under pressure lately. “You need to pick what private credit you’re in and you now are getting increasing transparency in terms of whether there is exposure to software, which is definitely a sector under stress,” she said. “A well-managed private credit fund is going to deliver you income, and that’s not been in doubt.” Desai also finds emerging markets compelling. She liked the sector coming into the year, although it took a hit when the war with Iran started. However, it will benefit from a ceasefire, which had been in place before President Donald Trump declared it “over” on Wednesday. “Unlike the developed markets, who accommodated massive fiscal expansions and overly loose monetary policy for overly long periods of time, emerging markets could not afford to do this, so they have, in general, run more conservative fiscal policy,” Desai explained. “[They] do not have the ability to run completely profligate and easy monetary policy either, mainly because exchange rates depreciate, they don’t have the reserves, they are forced into being better economically managed.” She suggests finding a well-run EM fund, which will offer a lot of value. She doesn’t recommend buying single names. Meanwhile, developed markets outside the United States are a good place to also go for duration, Desai said. “It’s probably a better bet, because growth will not be as strong, for example, in large swaths of Europe as it’s likely to be in the U.S., and these are different reasons to perhaps prefer taking duration via global funds than purely U.S.,” she noted. Duration measures a bond’s sensitivity to interest rates, so that longer-dated maturities have greater duration. For diversification across the asset classes, investors can consider a multi-sector bond fund, which includes a wide variety of credit sectors, Desai said. Those who want some liquidity should barbell their credit exposure with some ultra-short bond funds — instead of hiding out in cash. “People need to get invested,” Desai said. “At least go dip your feet back into … the short duration/ultra-short funds to try and juice up, a little bit, your return.”
