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….
Read More: Where this top bond manager is investing for income in the second half
