As Fed raises key rate, bonds remain attractive

Higher yields have made bonds substantially more attractive by improving expected income and their potential diversification benefit.

• On September 16, 2026, the Federal Reserve raised its policy rate target to 3.75%–4% after August inflation data showed persistent risks at both the consumer and producer levels.
• Vanguard expects one additional rate hike, bringing the federal funds target range to 4%–4.25% by year-end.
• After the August 10–11 inflation releases, the probability of a September hike implied by futures markets rose from little more than 50% to over 90%.
• By September 16, the 10-year Treasury yield had risen 34 basis points since July 29 to 5.01%, while the 30-year Treasury yield stood at 5.35%; the 10-year yield was up 83 basis points year to date.
• Fiscal deficit concerns and competition for capital from an AI-led investment cycle have also contributed to higher yields, while a future economic slowdown could allow rate cuts and support bond prices.

Takeaway: Higher starting yields have improved the long-term return opportunity and potential equity-volatility cushion offered by fixed income, although investors remain exposed to rising-rate and issuer-credit risks.