The simple part of your portfolio is getting a lot more complicated.
As interest rates rise, bonds are becoming a drag on investment portfolios. Bond prices move inversely to yields, and yields have been climbing all through this year, leaving many investors with subpar performance or outright losses in their so-called safe investments. There is no quick fix for the problems bedeviling the bond market, whether persistent inflation, rising government debt, or the torrent of issuance by corporate borrowers that threatens to crowd out demand for U.S. Treasuries. Thus, bond investors now need a different and more strategic approach to their bondholdings than they did just a year or two ago.
"We are in a different environment now," says Andrew Briggs, director of portfolio management at Plaza Advisory Group. "It does change the way fixed income fits into a portfolio."
The yield on the benchmark 10-year Treasury note began the year at 4.16%. On Sept. 1, it reached a 19-month high of 4.8%. The yield on the 30-year Treasury bond hit 5.32% in mid-August, and recently settled just below that, at 5.27%. The rise in long bond yields, in concert with mounting U.S. debt, led Treasury Secretary Scott Bessent to announce in late August that the U.S. will buy back at least $4 billion of 10- to 30-year bonds-an unusual step designed to put a lid on rising yields.
Given this backdrop, a sizable allocation to a popular exchange-traded fund such as iShares Core U.S. Aggregate Bond (ticker: AGG) or iShares 20+ Year Treasury Bond (TLT) may not do much to bolster a portfolio. AGG has returned almost nothing this year, while TLT has had a total return of -2.36%. Investors worried about inflation may want to avoid long-term bonds entirely.
All that said, today's bond yields are hardly anomalous. To the contrary, they are normal by historical standards, unlike the abnormally low, and in some countries negative, bond yields that prevailed in the years since the 2007-08 financial crisis.
"In a historical sense, rates really aren't that out of whack," says Michael Cuggino, president and portfolio manager at the Permanent Portfolio Family of Funds. "The question investors need to answer is: Is the downward trend in yields you've seen since over the past 40-plus years reversing?"
The answer appears to be yes. Cuggino has been investing in relatively short-term bonds, consistent with his view that rates can continue to rise. He says long-term rates haven't been meaningfully enough above short-term rates to compensate for the additional risk of higher yields and lower prices.
The bond market's proximate concern is inflation, which eats away at the value of the money returned to investors when their bonds mature. Although inflation has fallen sharply from a postpandemic high of around 9%, it has recently been running at a 3.4% annual rate based on the consumer price index, partly reflecting higher energy prices tied to the Iran war.
Consider that an investor who bought a 10-year Treasury note in 1970 was able to lock in an 8% annual yield. But when the principal was returned in 1980, it had lost half its value to inflation.
Federal Reserve Chairman Kevin Warsh has pledged to bring inflation back down to the central bank's longtime target of 2%. But some skeptics doubt his ability, if not his resolve, not least because higher inflation will help the U.S. pay down its $40 trillion debt load by reducing the value of its obligations.
"What's the solution [to the federal debt]? You inflate your way out," says John Montgomery, founder of Bridgeway Capital Management. "With fixed income, people think they're investing in something safe, but it's not safe. It's wildly risky. You have a couple of years of high inflation like we've experienced in this country previously, and that decimates a fixed-income portfolio." Montgomery says he recently removed bonds from his personal portfolio, replacing them with international equities, a trade that has worked well this year.
Rising government debt, not only in the U.S. but across the developed world, presents a longer-term worry for bond investors. For one, it adds to the supply of bonds, which depresses prices and pushes up yields. Indeed, debt-related worries may be the biggest driver of the recent run-up in yields, given that market-based measures of inflation expectations have stayed in check even as rates have risen.
U.S. companies issued $1.68 trillion of debt in 2026 through August, up 27% from the same period in 2025, according to Sifma Research. The AI hyperscalers, or cloud-service providers, alone issued $219 billion in investment-grade bonds this year, according to Bank of America, with most of the proceeds earmarked for data-center development. While most large tech companies are financially strong based on credit ratings and other measures, questions are cropping up about some issuers. The cost to insure Oracle debt for five years has risen from 0.4% of bond value a year ago to more than 2%, indicating a meaningful rise in the perceived risk of default.
Irrespective of credit risk, the supply has put pressure on prices. "Heavy investment-grade issuance and hyperscaler funding needs-not just Treasury supply-help explain higher real rates," writes Barry Knapp, managing partner of Ironsides Macroeconomics. "If AI infrastructure capex [capital expenditure] slows over the next several quarters, supply pressure on long-maturity real rates should ease and support a countertrend rally in Treasuries."
The flood of tech issuance could impact portfolio-construction decisions. Bank of America notes that if their current issuance continues apace, the five hyperscalers-Alphabet, Amazon.com, Meta Platforms, Microsoft, and Oracle-will account for 6.3% of the U.S. investment-grade debt market at the end of 2027, up from 3% at the end of 2025.
"In a well-balanced portfolio, you might suddenly be getting even more exposure to tech, not just on the equity side but also on the bond side," says Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers.
While the recent spike in yields has captured headlines, the fear and loathing of the bond market is hardly universal. Some economists readily dismiss the doomsayers, while many money managers see tactical opportunities in Treasuries now that prices have fallen.
"The narrative in rates today is all about inflation and fiscal problems," says Torsten Sløk, chief economist at Apollo. "But the narrative going into 2027 is going to be all about the success or failure of AI."
Slok predicts that if AI manages to boost productivity, this will be "massively deflationary and push rates lower." But if AI doesn't deliver the expected returns to Corporate America, "the bubble bursts and the Nasdaq is down 50% as investors rotate out of equities into Treasuries, and long rates fall dramatically."
Either way, he suggests, investors will kick themselves for not locking in long-term yields around 5% when they had the chance.
Still, many firms, such as RFG Advisory, which manages $9.5 billion, are drawn to shorter maturities in the Treasury and corporate markets. "It's not that I don't think a 4.7% yield on a 10-year Treasury is attractive, but you might be able to buy it at 5%," says RFG's chief investment officer, Rick Wedell.
Citing inflation, a decline in the U.S. credit rating, and increased corporate borrowing, Wedell says, "None of these things appear to be changing anytime soon, and if anything, they appear to be getting worse."
He says he feels a bit better about corporate credit than Treasuries, particularly on the shorter-term side, and recently increased client portfolio allocations to the Vanguard Short-Term Corporate Bond ETF.
Lucy Johns, director of fixed income at Dodge & Cox, says corporate balance sheets have been strong, and suggests concerns about the data-center builders may be overstated. "Many of these hyperscalers have very strong franchises, and very strong cash-flow-generating businesses," she says.
As a result, she adds, they don't need their AI investments "to work out perfectly for them."
The Dodge & Cox Income fund, which Johns co-manages, increased its corporate-bond allocation to 30% from 27% this year. As of June 30, it owned Amazon and Oracle bonds. In total, it owns bonds from 68 issuers. The fund has a higher yield spread than the iShares Core U.S. Aggregate Bond ETF, as well as a shorter duration.
The Dodge & Cox fund has outperformed the AGG over the past five years, generating a total return of 4.5% through Sept. 1.
Some bond analysts and managers see better opportunities abroad. Jeff DeMaso, editor of Independent Vanguard Adviser, recently advised shifting toward the Vanguard Total World Bond ETF, which allocates equally to the U.S. and non-U.S. bond markets, and includes a mix of government and corporate bonds. It pays a yield of 4.3%, in line with the 4.4% yield for the Vanguard Intermediate-Term Treasury ETF.
"When you're investing in bonds, the question to ask yourself is: Am I getting paid to take risk? And when you're not, you should just diversify," DeMaso says. "I don't think the U.S. government will default, but I don't think I'm getting paid to take on the risk that something does change in how we think about our debts."
Wedell is of similar mind. "All fixed-income markets track the U.S. to a certain degree, but you can get a bit of the benefit of diversification by moving to some international, and also by moving into some corporate," he says.
While rates in much of the world have been rising in concert with the U.S., emerging market bonds have performed relatively well. Louis-Vincent Gave of Gavekal Research recommends buying Chinese bonds, in part because he thinks the Chinese currency is undervalued and the Chinese government is allowing it to rise a bit. "Combine this forex [foreign exchange] gain with the bond coupon, and renminbi [denominated] bonds seem set to deliver a roughly 8% annualized U.S. dollar return, and this with very low volatility," he writes.
While some investors, like Bridgeway's Montgomery, have given up on bonds, most still regard them as an essential holding. "I don't own fixed income because I think it's going to outperform equities," says Wedell. "I own fixed income because it's a hedge for my equity portfolio."
He notes that "the only time that we ever had clients really squawk about [the performance of bonds] was in 2022," when both bonds and stocks declined sharply.
Still, there are reasons to worry this could happen again. The correlation between the S&P 500 and Treasuries has been positive since March, according to Bloomberg data, and hit a 30-year high in June.
Plaza Advisory's Briggs has shifted some of his clients' bond allocation to alternative investments, bringing overall allocations toward 65% equities, 22% fixed income, and 13% "alts," versus 70/30 equities/bond portfolios before the Covid pandemic. Among alternative assets, he favors liquid-alternative funds, including a market-neutral equity strategy and global macro strategies.
Briggs says a more inflationary, higher-rate environment could produce heightened interest-rate volatility, which can cause "a more positive correlation between equities and fixed income, as they both react negatively to higher interest rates."
Donald Calcagni, chief investment officer at Mercer Advisors, says that "private credit is arguably pretty tough to beat" for investors willing to give up liquidity to get more yield. He prefers private credit to high-yield bonds, explaining that private-credit funds' exposure to a large number of smaller companies provides better diversification. Also, much of the debt held by private-credit funds is floating-rate, he notes, minimizing the deleterious impact of a potential increase in yields.
Critics have questioned the quality of some of the underlying credits in private-credit portfolios, given some funds' high exposure to software companies at risk of displacement by AI, and a handful of private-credit defaults this past spring. But Calcagni says a portfolio 60% allocated to the Vanguard S&P 500 ETF and 40% allocated to the AGG will tend to capture too much downside and not enough upside.
"It isn't that 60/40 is broken, but I'd argue it suffers from user error," Calcagni says.
What is most clear is that with big questions looming over the bond market, the "40" has gotten a lot more complicated. Most investors spend the majority of their time on the equity part of their portfolio.
Times change.
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