Okay, I have to admit, I don't think Iceland has the best bread. Compared to other European countries. But I have to say, this bakery in Sauðárkrókur has some really nice bread! The best in the country in my humble opinion. So stock up o some bread if you are in the area.
And Icelanders are always pretty good at making cakes and pastries. So make sure to try some of those too.