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Bond Yields: The Long and Short of It
Longer-term trends are keeping government bond yields higher – and the asset class is losing its diversification benefits in the process.
- Volatility & Risk
Key Points
Longer-term secular factors are winning out over short-term cyclical forces in shaping bond yields, sending them higher.
A growing supply of government debt, competition with the technology sector’s relentless pace of issuance and a shifting buyer base outweighs softer inflation and cooling economic activity.
Bonds are moving more closely with equities, leaving investors with an asset that is neither compellingly cheap nor as reliably protective as it once was.
Government bond yields have risen roughly 70 basis points over the past six months, and investors hoping for relief are learning an uncomfortable lesson: not all forces moving markets pull with equal strength. Tellingly, the recent decline in expected inflation brought no reprieve. Nominal yields held firm, so the entire adjustment fell on real rates, which have continued to climb.
Yields are shaped by two sets of hands. Longer-term secular factors – the structural supply and demand for capital – grind slowly but powerfully. Short-term cyclical forces – the ebb and flow of growth and inflation – tug in the opposite direction. Right now, the market is a tug of war, and the cyclical camp is losing.
On paper, the cyclical case for lower yields is respectable. Inflation prints have softened, labor markets are cooling, and the global manufacturing cycle is softening. In an earlier era, that trio would have been enough to rally bonds convincingly.
Yet the secular team is simply stronger. Fiscal dynamics across most major economies point to relentless issuance, with deficits structurally embedded and little political appetite to shrink them. This arrives just as the technology sector ramps up debt-funded capital expenditure, competing for the same pool of savings. The buyer base has shifted, too: the once-reliable bid from international investors is fading, replaced by domestic holders who invest at shorter horizons and are more swayed by sentiment than by yield.
The cyclical bulls also face a nagging doubt. Markets increasingly fear second-order inflation effects, as tighter energy markets, firmer fertilizer and oil distillate prices, and rising shipping costs feed through the system. Central banks offer reassurance by stressing vigilance on inflation risks, and several larger ones have already lifted rates, hardly the posture of an easing cycle.
For those tempted to buy the dip, the valuation case is only lukewarm. Term premium, compensation for the risk of holding longer-dated paper, has risen, but merely back to its historical average. Fair, not cheap.
The deeper worry for asset allocators is subtler. The correlation benefit of owning bonds has reversed. For most of the post global financial crisis (GFC) era, bonds rallied when equities fell, providing dependable diversification. That insurance policy has lapsed.
This leaves investors holding an asset that is neither compellingly cheap nor reliably protective, in a market where the strong forces push one way. For now, our team’s recommendation remains to be underweight bonds relative to stocks.
— Peter Wilke, CFA – Head of Tactical Asset Allocation, Global Asset Allocation
Interest Rates
Market participants entered the July Federal Open Market Committee (FOMC) meeting with unusually little conviction on the likely outcome. Chairman Warsh’s shift to brevity in his public comments and clear reluctance to offer forward guidance left investors with less policy visibility ahead of his second meeting as chair. While policy rates were held steady, three Committee members dissented in favor of a 25-basis-point hike.
Warsh made clear that keeping rates unchanged was the best decision, while emphasizing that future decisions will not be “inertial.” He repeatedly returned to that framing in the press conference, noting that the Committee may act if incoming inflation data is inconsistent with achieving price stability. The initial market reaction to the statement was muted, but comments on higher yields, tighter financial conditions and the potential implications of a smaller balance sheet were interpreted as reducing the likelihood of near-term hikes. The yield curve steepened as long-end yields moved higher during and after the press conference.
Even so, incoming inflation data still needs to justify additional tightening, and we remain neutral on duration.
— Dan LaRocco, Head of Liquidity, Global Fixed Income
- The FOMC held rates steady in July, though three members dissented in favor of a hike.
- Warsh emphasized that future decisions will not be “inertial,” keeping inflation data central to the policy path.
- We view additional tightening as less likely than current market pricing implies and remain neutral on duration.
Credit Markets
High yield declined modestly in July, its first monthly loss since March, as rising Treasury yields and a 9-basis-point widening in spreads weighed on returns. The move coincided with softer equity markets, where geopolitical tensions and increased scrutiny over the cost of artificial intelligence infrastructure weighed on investor sentiment.
Primary activity underwhelmed, in contrast to investment grade cash markets. High yield issuance totaled $18 billion in July, broadly in line with the monthly average but well below street expectations. The slower pace reflected the delay of a large merger and acquisition (M&A) funding deal and less attractive refinancing economics for higher-quality issuers, especially 2020–2022 vintage bonds that continue to benefit from low coupon costs.
With current market yields are above coupons for many issuers, refinancing-related supply is less compelling despite otherwise open capital markets. We expect issuance to remain slow this month, limiting net supply and potentially providing a short-term technical tailwind for the asset class.
— Ben McCubbin, Co-Head of High Yield, Global Fixed Income
- July issuance was in line with monthly averages but well below street consensus estimates.
- A delayed M&A funding deal and less attractive refinancing opportunities contributed to underwhelming primary activity.
- We expect issuance to remain slow this month, which could be a short-term tailwind for the asset class.
Equities
Earnings revisions across the S&P 500 Index paint a far more differentiated picture in 2026 than a year ago. Earnings per share (EPS) revision dispersion has widened sharply, with the gap between the strongest and weakest sectors expanding from 43% to nearly 175% in 2026.
Cyclicals have led the upgrade cycle, with Energy and Communication Services seeing the strongest earnings revisions and reversing their 2025 trajectories. Technology and Financials have remained consistently positive, underscoring the durability of their earnings growth. In contrast, Utilities, Consumer Staples and Health Care are in negative revision territory, reflecting margin pressure and sector-specific headwinds.
While market leadership remains concentrated in a narrow group of stocks, stock-level movements are becoming increasingly dispersed beneath the surface. The widening gap between sector winners and losers suggests a broader opportunity set for active and systematic investors as fundamentals play a larger role in driving relative performance.
— Jordan Dekhayser, Senior Equity Client Portfolio Management and Daniel Kim, Associate Equity Client Portfolio Manager
- EPS revision dispersion across S&P 500 Index sectors has widened sharply in 2026 versus 2025.
- Energy and Communication Services have led cyclical upgrades, while several defensive sectors have moved into negative revision territory..
- Wider revision dispersion broadens the opportunity set beneath narrow index leadership.
Real Assets
The energy transition is best understood as a story of energy addition rather than energy replacement. Energy demand continues to rise, driven by economic growth, reindustrialization and the rapid expansion of artificial intelligence infrastructure, with data centers becoming a major source of incremental power consumption.
While renewable sources such as solar and battery storage are expected to gain share, they are unlikely to fully displace traditional fuels. Alternative energy consumption is projected to more than double by 2040, yet traditional energy sources are still expected to account for approximately 65% of total energy use. Natural gas remains a critical transition fuel given its lower emissions profile and ability to provide reliable power.
Looking ahead, rising demand, energy security concerns and grid reliability requirements should drive investment across both traditional and alternative energy value chains, creating attractive opportunities across the broader energy ecosystem. We affirm a tactical overweight to global listed infrastructure on strong earnings growth and attractive valuations.
— Jim Hardman, Head of Real Assets, Multi-Manager
- Higher energy demand forecasts support investment across the broader energy ecosystem.
- While alternative energy should expand significantly, traditional energy sources are still projected to meet nearly two-thirds of global energy needs.
- We affirm a tactical overweight to Global Infrastructure on strong earnings growth and attractive valuations. .
Unless noted otherwise, data is sourced from Bloomberg as of August 2026.
Main Point
Government bonds are neither cheap nor reliably protective
The shift is robbing investors of a key source of diversification.
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