Bond Yields: The Long and Short of It

Structural forces are likely to keep government bond yields elevated and weaken bonds’ diversification role, supporting an underweight versus equities.

• Government bond yields rose roughly 70 basis points over the six months to August 2026; softer inflation and weaker activity have not lowered nominal yields because real rates continued to rise.
• Persistent fiscal deficits, increased debt-funded capital expenditure by the technology sector and a shift from international to shorter-horizon domestic buyers are outweighing cyclical support for bonds.
• Term premium has returned to its historical average rather than reaching cheap levels, while bond-equity correlation has become more positive after bonds had generally rallied when equities fell during most of the post-GFC period.
• The July FOMC kept rates unchanged, but three members dissented for a 25-basis-point hike; Northern Trust considers further tightening less likely than market pricing and remains neutral on duration.
• High-yield issuance totaled $18 billion in July, with spreads widening 9 basis points, while S&P 500 earnings-revision dispersion between the strongest and weakest sectors widened from 43% to nearly 175% in 2026; Energy and Communication Services led upgrades, and the firm maintained a tactical overweight to global listed infrastructure.

Takeaway: Investors should remain underweight bonds relative to stocks because yields are only fairly valued and bonds offer less protection in equity selloffs, while limited high-yield supply may provide a short-term technical tailwind and strong energy demand supports global infrastructure.