Bonds have had a hard few years and the reasons behind it are worth understanding. As one of the four great asset classes, they’ll still matter long after this year’s headlines move on.
When COVID put the global economy on ice in 2020, central banks cut interest rates almost to zero. The US Federal Reserve cut its main rate by 1.5 percentage points in under two weeks in March 2020, then held it near zero for two years. The Bank of England and the European Central Bank kept their rates at similar lows.
Then inflation came back. The Fed began raising rates in March 2022, and by July 2023 it had taken them above 5%. The Bank of England and the ECB followed similar paths.
When interest rates rise, the price of existing bonds falls. Say you own a bond paying 5% a year, and new bonds start paying 6%. Buyers will only take yours at a discount, enough to make up for the lower interest. The longer your bond has left to run, the bigger that discount has to be, which is why long-term bonds were hit hardest.
Long-term bonds have a reputation as the safe (less volatile) part of a portfolio. The last few years are a useful reminder that safety depends on what you own and when you need the money.
Two things have kept pushing yields up, and bond prices down. The first is inflation. Through 2026, it stayed stubborn and the rate cuts many expected didn’t arrive, so investors wanted higher yields to make up for it. The second is supply. Governments are borrowing heavily, and the largest technology firms are borrowing to fund the AI buildout. One estimate puts the AI spending needed by 2030 at around $5.5trn. More bonds for sale means yields have to rise to attract buyers, and with so much borrowing still to come, that pressure could last for some time.
This isn’t only an American story. By late September 2026, yields on 30-year UK government bonds were close to 6%, their highest this century. Japanese government bond yields were at a 30-year high, and German yields had risen sharply too.
Investors around the world are asking for more in return for lending to governments. None of this tells us where yields go next. They could rise further, fall back or stay where they are. You’ll read plenty of confident forecasts. Very few people get them right consistently, which is why we don’t build portfolios around predictions.
It also helps to remember why we own bonds at all. It isn’t to make the most money. Over time, shares (the great companies of the world) do that job better as part of our ‘family fortress’. Bonds are there to hold steady as part of our ‘war chest’ when shares go up and down due to short-term market volatility, so there’s money to draw on in order to fund the life you want without selling shares at an inopportune moment.
That steadiness has a cost, because money in bonds isn’t growing as fast as it might in shares. Think of it like buildings insurance. You can pay it for decades without making a claim, and it still wasn’t money wasted.
So what does this mean for the portfolios we manage? Much less than the headlines suggest, for two reasons.
First, one of our core principles is to match assets to needs. We use long-term assets, mainly shares, for long-term goals, and short-term assets for short-term needs. That’s why the bonds we advocate you hold are generally short-dated, lent to creditworthy governments and companies, and spread across many countries, rather than reaching for a little extra yield in longer ones. That approach has meant our portfolios have had less exposure to the sharpest price swings in longer-dated bonds.
Second, over the long term, a bond portfolio’s starting yield has been one of the most reliable guides to its eventual return. Higher yields today, on short or long bonds, generally mean better expected returns from here, though they’re never guaranteed. Rising rates hurt in the short term, of course. They also mean every new bond and every reinvested coupon now earns meaningfully more than it did when yields were close to zero. And you no longer need to lend for decades to earn a reasonable yield.
News headlines can be unsettling, and often confusing. I hope this gives you a clearer picture of why the bond market’s troubles affect us less than they might appear to.
Sam Instone is founder and CEO of AES International
