Bonds: Normal for Longer

One of the most common phrases in markets over the past three years has been "higher for longer." The phrase implies that today's bond yields are unusually elevated. We think this framing misses a more important point. The truly unusual period was the decade-plus after the Global Financial Crisis (GFC), when mediocre growth, private-sector deleveraging, quantitative easing, zero interest rates and persistent inflation shortfalls pushed both policy rates and bond yields to exceptionally depressed levels. Today's yields look unusual only because investors became anchored to an abnormal starting point.

The same can be said for several other relationships that investors have come to view as normal. Inflation has proven more persistent, stock-bond correlations have become more positive and the economy has remained resilient despite borrowing costs that many investors expected would prove restrictive. If the post-GFC world was defined by weak growth, deleveraging and persistent disinflation, today's environment is characterized by stronger nominal growth, healthier balance sheets and higher investment demand. That helps explain why yields have returned to levels that look much more normal historically. This broader normalization process is making the current environment look increasingly different from the post-GFC period and, in some respects, more similar to earlier economic cycles.

The most important macro development this year has not been the rise in bond yields. It has been the resilience of growth.

Following the outbreak of the Iran conflict, many investors expected an oil shock that would simultaneously lift inflation and weaken growth. Inflation did move higher. Growth, however, did not slow as expected.

Instead, economic activity strengthened. Consumption has been robust, AI capex boomed, manufacturing activity improved and earnings expectations moved higher. The Atlanta Fed is currently tracking third-quarter GDP growth at 5%. Viewed through this lens, the coexistence of higher equity markets and higher bond yields is far less surprising. Both are responding to an economy that continues to grow faster than expected alongside inflation that remains above target. In short, many investors predicted stagflation; instead, we got reflation.

Exhibit 1: US 10-year Treasury yields are just above their long-term average

Exhibit 2: 10-year Treasury yields generally move with nominal GDP growth

A major reason growth has remained resilient is that households and businesses entered this period in unusually strong financial condition. The post-GFC period was characterized not only by unusually low interest rates, but also by a prolonged period of private-sector deleveraging. Households repaired balance sheets, corporations reduced leverage and credit growth remained subdued. While this process suppressed growth during much of the 2010s, it also left the private sector unusually resilient entering the current decade.

This resilience helps explain why markets have repeatedly underestimated growth. The economy absorbed the sharpest global tightening cycle in decades. It absorbed the energy shocks associated with both the Russia-Ukraine and Iran conflicts. It absorbed rising tariffs and growing trade restrictions. Each time, expectations for a sustained retrenchment in spending proved too pessimistic. Consumers continued spending, businesses continued investing and growth consistently slowed less than expected. Strong private-sector balance sheets are a major reason why.

Exhibit 3: Household and corporate leverage are at multi-decade lows

Fiscal concerns have become a frequent explanation for this year's rise in bond yields. Yet that explanation struggles to explain why yields have risen across most developed markets, and in many cases by more than in the United States.

Bond investors are reassessing more than fiscal trajectories. They are reassessing the outlook for growth, inflation and policy rates. Indeed, most of the increase in long-term yields across regions can be explained by higher policy-rate expectations, suggesting growth and inflation remain the more important story. Fiscal concerns may be contributing at the margin, but the broader message from bond markets is that economies continue to demonstrate an ability to absorb higher rates. Markets are increasingly being forced to price an environment in which growth remains resilient and policy rates stay higher than previously expected.

Exhibit 4: Decomposition of the YTD change in 10-year government bond yields across major developed markets

The normalization story extends beyond interest rates.

Many investors have been surprised by the return of positive stock-bond correlations. Historically, however, positive correlations were common. Prior to the late 1990s, inflation was more variable and inflation surprises frequently pushed equities and bonds in the same direction. The strongly negative stock-bond correlation that investors became accustomed to over the following two decades reflected a period in which inflation remained firmly anchored around 2%.

Today's environment looks different. Inflation is not running at the extremes experienced in 2022, but neither has it consistently returned to target. Our research shows that stock-bond correlations have historically become positive once inflation moves above roughly 3%. A return to negative or at least near-zero stock-bond correlations will depend on central bankers’ ability to get inflation closer to their 2% targets.

We think ultimately they will be successful, and recent policy tightening displays a commitment to doing so. But either way, this does not mean bonds have lost their diversification benefits. The key distinction is between inflation shocks and growth shocks. Bonds will continue to face pressure during inflation surprises, but they should continue to perform their traditional role when growth expectations deteriorate. If markets were forced to reassess the outlook for AI investment, consumption or broader economic activity, lower yields would likely accompany that adjustment.

Exhibit 5: Stock-bond correlation across inflation regimes

The implications for investors are not to abandon bonds, but to be more precise about the risks they are intended to hedge.

If growth disappoints, duration should provide protection. Higher starting yields provide a much better cushion than investors enjoyed during the post-GFC period, and we favor adding duration on dips, particularly in markets where growth risks are greater and substantial tightening is already priced.

If inflation proves stickier than expected, other diversifiers become increasingly important. Commodities and gold have historically performed well during inflation surprises and we think they deserve a more structural role within diversified portfolios.

We therefore continue to prefer equities to fixed income, but see greater value in government bonds than at any point in much of the past decade. A world characterized by more persistent inflation and more frequent supply shocks also argues for a greater role for tactical asset allocation, as markets alternate between worrying about growth and worrying about inflation.

The prevailing narrative may be that bond yields are "higher for longer." We would frame it differently. What investors are experiencing is not simply a world of higher rates, but a return to more historically normal macroeconomic conditions. Growth has been stronger, inflation stickier and private-sector balance sheets healthier than many expected. Viewed through that lens, higher yields, more positive stock-bond correlations and resilient risk assets are not separate puzzles. They are all symptoms of the same reality: the post-GFC era was the exception, not the rule.

The chart below shows the views of our Asset Allocation team on overall asset class attractiveness for global equities, rates and credit as of 23 September 2026. The rest of the ratings pertain to the relative attractiveness of certain regions within the asset classes of equities, bonds, credit and currencies. Because the Asset Class Views table does not include all asset classes, the net overall signal may be somewhat negative or positive.