Written by Cormac Nevin
Bonds had another difficult week. The Bloomberg Global Aggregate Index (a broad measure of high quality bonds around the world, hedged into sterling) returned -0.5%, UK bonds returned -0.6% and long-dated bonds fell by more. The cause was rising yields. A bond’s yield is the annual return you earn from holding it, and when yields rise, prices fall. The 10-year US Treasury yield moved above 5% for the first time since 2007, and the 10-year UK gilt (a loan to the government paying a fixed rate of interest) yielded around 5.4%, close to its highest level in nearly twenty years.
Several things pushed yields higher. US business surveys came in at their strongest in over four years, evidence that the economy is coping well with the Federal Reserve’s (the US central bank) decision the week before to raise interest rates to 3.75%-4.00%, its first increase since 2023, with another signalled before year end. Fed officials spoke of further action to bring inflation down, and demand at two US government bond auctions was weak. Oil remained close to $100 a barrel. At home, the Bank of England held rates at 3.75%, but three of its nine members voted for a rise, with UK inflation still at 3.1%.
What is interesting about the rise in yields is that investors did not start expecting more inflation: market measures of expected US inflation have not moved upwards. Instead, the rise was almost entirely in the “real” yield, meaning the return on offer after inflation. A high-quality US government bond now pays roughly 2.5% to 3% a year more than expected inflation. For most of the past twenty years, that figure was close to zero, and at times negative. “Carry” is the income you earn simply by holding a bond, and over time it makes up most of what bonds return. At 1% or 2%, that cushion was thin. At around 5% today, higher starting yields making it more likely that better returns lie ahead for those with sufficient patience.
Equities (company shares), for their part, took the bond sell off in their stride. The MSCI All Country World Index (a broad measure of global stock markets) returned +1.8%, flattered by a weaker pound as the US dollar rose +1.1%. The technology-focused NASDAQ 100 returned +4.2%, the S&P 500 (a measure of 500 of America’s largest companies) +2.1%, and South Korea, home to the world’s largest memory chip makers, rose +6.7%. The FTSE All Share (a broad measure of the UK market) returned +0.4%. The Bloomberg Commodity Index (a broad measure of commodity prices) returned -0.7% as oil eased on reports of a phased US-Iran agreement to reopen the Strait of Hormuz.
Falling bond prices are never pleasant, but they are the mechanism by which future returns are rebuilt. The income now available across the bond market is the best in a generation, and it is exactly what diversified portfolios need to do their job. Keep calm and let the carry do its work.
All performance figures are stated in Sterling terms, unless otherwise specified.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
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All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 28th September 2026.
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