Monthly Investment Portfolio Management

Rethinking Bonds: Are they back or a bad bet?

What you need to know

Interest rates recalibrated. Strong economic data and lingering inflation pressures drove some global interest rates to multi-decade highs.
Markets left few places to hide. Stock and bond markets broadly weakened, adjusting to the higher-rate reality, though tech demonstrated resilience, providing support for well-diversified portfolios.
Bonds are back, but positioning matters. Volatility remains possible, but decades-high yields renew the appeal of bonds, such as by improving their long-term return and diversification potential.
Put higher yields to work, managing risk in alignment with your objectives. A laddered core of high-quality bonds, selective credit exposure, thoughtful cash management, and disciplined rebalancing can help you stay focused on your investing purpose, without the need to precisely time peak rates.

Portfolio tip
Market weakness can create tax-planning opportunities, such as by increasing the potential to harvest losses, which may help offset gains realized elsewhere.

Equity and fixed-income market performance

Source: Morningstar, 9/30/2026. U.S. large-cap stocks represented by S&P500 TR Index. International large-cap stocks represented by MSCI EAFE NR Index. U.S. mid-cap stocks represented by Russell Mid-cap TR Index. U.S. small-cap stocks represented by Russell 2000 TR index. International small- and mid-cap stocks represented by MSCI EAFE SMID NR Index. Emerging-market equity represented by MSCI Emerging Markets NR Index. U.S. investment-grade bonds represented by Bloomberg US Aggregate TR Index. U.S. high-yield bonds represented by Bloomberg US HY 2% Issuer Cap TR Index. International bonds represented by Bloomberg Global Agg Ex USD TR Hgd Index. Emerging-market debt represented by Bloomberg Emerging Market Agg Index. Cash represented by Bloomberg US Trsy Bellwethers 3Mon TR Index. Past performance does not guarantee future results. Market indexes are unmanaged, cannot be invested into directly and are not meant to depict an actual investment. Chart description

Where have we been?

Interest rates recalibrated as economic strength and inflation persist. The 10-year Treasury yield climbed toward 5.3% in September, reaching its highest level in over 20 years and marking a sharp increase from 4.75% at the start of the month and 3.95% at its early 2026 low. While several forces influenced interest rates, including fiscal concerns and bond supply, two key themes stood out:

Economic growth: September brought a steady stream of data showing strong consumer spending, accelerating business activity across both manufacturing and services sectors, and a labor market remaining on solid footing. By the end of September, the Atlanta Fed GDPNow forecast suggested that third-quarter real GDP growth was tracking close to 4%. While this strength contributed to the rising interest rates, it also underscored the economy's resilience and its ability to withstand a higher-rate environment.
Inflation: Persistent inflation also kept upward pressure on interest rates. Energy markets contributed to those pressures early in the month as Middle East tensions intensified, although prices later eased as supply risks appeared less severe. The Federal Reserve raised its policy rate for the first time since 2023, reinforcing its commitment to bringing inflation back toward target and indicating additional tightening could follow.

These dynamics were not confined to the U.S. Resilient growth and persistent inflation also pushed bond yields higher across other major developed markets, including Japan, the United Kingdom, and Germany.

Markets adjusted to the higher-rate reality. Higher interest rates were a key driver of market performance in September, pressuring both stocks and bonds even as economic growth remained resilient.

Rates weigh on stocks, though tech supports. While one-year returns remain strong, September lived up to its historic reputation as one of the weakest months of the year for stocks as higher interest rates weighed on market sentiment and stock valuations.

Economically sensitive and rate-sensitive asset classes, including small- and mid-cap stocks, underperformed amid concerns that persistently elevated rates could eventually temper economic activity and earnings growth. Meanwhile, a strengthening dollar added pressure to international equity returns.

Despite the broader weakness, tech-heavy sectors and asset classes provided support for well-diversified portfolios. Information technology and communication services sectors gained 4% during the month, helping U.S. large-cap stocks emerge as the top-performing equity asset class. Emerging-market stocks also held up better, aided by their meaningful exposure to technology-related companies.
Rising rates left few places to hide in bond markets. The global rise in interest rates created broad-based pressure across fixed income, with bonds declining across different regions and credit quality, offering fewer places for investors to find refuge. Against this backdrop, cash produced the sole gains within fixed income, given its minimal interest-rate sensitivity, while higher-quality international bonds held up better than U.S. and emerging-market debt.

What do we recommend going forward?

Put higher yields to work, managing risk along the way. Decades-high yields have renewed the appeal of bonds, particularly for income investors, improving their long-term return and diversification potential without requiring investors to precisely time the peak in interest rates.

Higher yields generate more income—historically the primary driver of long-term bond returns—while also providing a larger cushion against price declines if rates rise further. As a result, bonds may help portfolios better withstand near-term volatility while offering a more attractive foundation for long-term returns.

While higher yields have improved the long-term benefits of bonds, resilient economic growth, persistent inflation, and concerns surrounding government deficits and debt could continue to drive interest-rate and bond-market volatility in the near term.

However, we expect some of the supply-side inflation pressures, including those tied to energy prices, tariffs, and AI-related investments, to gradually fade. We also expect economic growth to remain positive, but moderate as tighter financial conditions weigh on business and consumer activity.

Together, these dynamics suggest that rates could remain elevated and volatile in the near term, but the need for additional monetary tightening is likely to remain relatively contained to 2 or 3 hikes from here—a backdrop that we believe supports our recommended overweight to stocks.

To navigate these dynamics, consider these portfolio actions:

Design with purpose—chasing the role, not the rate. Rather than structuring your portfolio around a precise rate prediction, ensure your fixed-income allocation is aligned with the role bonds are intended to play and the goals you're working to achieve. Your risk tolerance, time horizon, and financial objectives should serve as the primary guide for your strategic stock-bond mix. Maintaining discipline around that target allocation helps you stay focused on your purpose while benefiting from the improved long-term opportunity set in bonds.
Create a laddered core of higher-quality bonds. As reflected in our strategic asset allocation below, we recommend building the foundation of a bond portfolio with investment-grade bonds, which comprise more than 80% of the allocation. Prioritizing quality can help strengthen resilience during periods of market stress, while a laddered maturity structure further manages risk. Shorter-term bonds tend to be less sensitive to interest-rate movements, while longer-term bonds help reduce reinvestment risk by locking in today's higher yields for longer.
Supplement income with selective credit exposure. Given our outlook for continued economic resilience, consider complementing a core allocation of higher-quality bonds with a diversified allocation to lower-quality asset classes, such as U.S. high-yield bonds. A healthy economic backdrop may help keep credit spreads contained, supporting these more economically sensitive areas of the bond market. At the same time, their higher yields can help enhance the overall income potential of a bond portfolio.
Revisit the role of cash. Hold enough, but not more than you need. Cash holdings may provide emergency reserves, savings for a short-term goal, and funds for everyday spending. But when cash balances grow beyond those purposes, they may create an unintended drag on portfolios. After appropriate cash reserves are established, consider gradually putting the excess to work through a disciplined approach. Notably, with short-term bond yields moving higher alongside expectations for additional central bank rate hikes, today's short-term yield environment may present an opportunity to enhance income without taking substantially more interest rate risk than cash.
Use year-end planning deadlines to reposition bond allocations more efficiently. Strong stock market performance in recent years may have left some portfolios with larger equity allocations and smaller bond allocations than intended. As a result, investors may be less exposed to the benefits that bonds can provide. As year-end approaches, planning deadlines related to required minimum distributions, retirement account contributions, charitable giving, gifting strategies, and tax-loss harvesting may create natural opportunities to rebalance. These planned activities can help realign bond allocations with your intended targets while potentially minimizing the taxes or transaction costs that might otherwise accompany portfolio adjustments.

We’re here for you

In our view, bonds are back, but positioning matters. Consider speaking with your financial advisor about whether your bond allocation reflects your goals and puts today’s higher yields to work while managing the potential for near-term volatility.

If you don't have a financial advisor, we invite you to meet with an Edward Jones financial advisor to discuss how bonds may support your financial goals and broader investment strategy.

Strategic portfolio guidance

Defining your strategic investment allocations helps keep your portfolio aligned with your risk and return objectives, and we recommend taking a diversified approach. Our long-term strategic asset allocation guidance represents our view of balanced diversification for the fixed-income and equity portions of a well-diversified portfolio, based on our outlook for the economy and markets over the next 30 years. The exact weightings (neutral weights) to each asset class will depend on the broad allocation to equity and fixed-income investments that most closely aligns with your comfort with risk and financial goals.

Diversification does not ensure a profit or protect against loss in a declining market.