The American Century Inflation-Adjusted Bond Fund's performance in the fourth quarter of 2025 was notably affected by its Treasury Inflation-Protected Securities (TIPS) holdings. A primary factor for this divergence from its benchmark was the discrepancy in year-end securities pricing schedules between the fund and its comparative index. Economically, the United States is poised for potential growth in the initial half of 2026, driven by substantial fiscal measures, including an injection of approximately $150 billion in consumer tax benefits. Nonetheless, the Federal Reserve's policy decisions in 2026 are likely to be tempered by expectations of moderate economic expansion, inflation rates persistently above target, and unresolved concerns within the labor market.

Market Trends and Economic Projections for 2026

In the final quarter of 2025, the fixed-income sector in the U.S. experienced its fourth consecutive period of positive returns, marking a resilient close to a year characterized by economic volatility. This period included the longest government shutdown in American history, an increasing trend of corporate layoffs, a subdued consumer outlook, and growing discord among the Federal Reserve's policymakers. The American Century Inflation-Adjusted Bond Fund's performance reflected these broader market conditions, with its TIPS allocation notably underperforming its benchmark. This discrepancy is largely attributed to different valuation methodologies employed at year-end, specifically regarding securities pricing between the fund and its benchmark index. Looking forward to 2026, particularly the first half, the U.S. economy is anticipated to gather strength. This projected uplift is primarily supported by significant governmental fiscal stimulus, which includes an estimated $150 billion directed towards consumer tax benefits, designed to boost spending and economic activity. Despite this optimistic forecast for growth, the Federal Reserve's approach to monetary policy is expected to remain cautious. Factors such as a modest overall growth rate, inflation levels that continue to exceed the central bank's target, and lingering uncertainties in the labor market are likely to limit aggressive policy adjustments. Consequently, the Federal Reserve is currently expected to implement only one potential rate cut throughout 2026, indicating a continued focus on balancing economic stability with inflation control.

The investment landscape continues to be shaped by a complex interplay of economic indicators and policy decisions. The observed divergence in the performance of inflation-protected securities underscores the importance of scrutinizing valuation methods and their impact on portfolio returns, especially in volatile periods. As we move into 2026, the anticipated fiscal stimulus provides a hopeful outlook for economic recovery. However, investors and policymakers alike must remain vigilant regarding persistent inflationary pressures and labor market dynamics, which could significantly influence monetary policy and overall market stability. The Federal Reserve's cautious stance suggests a long road ahead for achieving sustained economic health and inflation targets, requiring a flexible and informed investment strategy.