MyFolio: why higher bond yields could turn from headwinds to tailwinds

Higher bond yields are shifting from a drag on multi-asset portfolios to a potential source of income, diversification and downside protection.

• UK 10-year gilt yields rose from just under 4.8% to around 5.4% in Q3 2026, while 30-year gilt yields reached 5.8%, their highest level this millennium; US 10-year Treasury yields rose from around 4.4% to above 5%, and Japan’s 10-year yield exceeded 3% for the first time since 1996.
• Aberdeen attributes the rise to sticky inflation after the energy shock, stronger-than-expected growth and a higher term premium driven by concerns over government debt and bond-market capital preservation.
• UK gilts faced additional pressure because pension schemes became less significant captive buyers, the Bank of England was selling bonds, and the Budget attracted heavy speculation; Aberdeen estimates that higher interest costs reduced the government’s roughly £24 billion fiscal headroom by more than half.
• Short-duration sterling corporate bonds fell by less than 0.5% in Q3, versus 2.6% for global government bonds and more than 3% for global corporate bonds, and short-dated bonds now represent one-third of MyFolio’s total bond exposure.
• Aberdeen sees three opportunities: rate expectations may have overshot its economists’ forecasts, the US 10-year real yield is nearly 3%, and bonds have recently rallied when technology and semiconductor stocks fell, suggesting diversification against an AI-trade reversal.

Takeaway: Fixed income has become more attractive for risk-managed multi-asset portfolios, but the view is conditional: Aberdeen assigns a 55% probability to its resilience scenario, 25% to New World Disorder and 15% to a Bond Market Rout, while US 10-year yields above 5.2% remain a risk for equities and portfolios.