The bond market’s comeback

Higher bond yields have restored the income and diversification role of high-quality bonds, while resilient growth supports selective risk-taking with greater downside protection.

• Government bond yields rose across developed markets as stronger economic data, inflation fears and fiscal concerns revived expectations of further rate increases.
• The 10-year US Treasury yield could rise to roughly 5.7% over one year or 6.6% over two years before total returns turn negative, according to the house’s analysis.
• Equity markets have remained resilient in 2026 despite higher borrowing costs, supported partly by investment in AI, energy infrastructure and defence.
• The portfolio remains moderately overweight equities, favouring US and emerging-market stocks, while adding downside protection and staying overweight gold.
• The US-China trade truce was extended for two months until 10 January, reducing immediate risks but not resolving strategic competition; investors will also track European inflation, US employment and Chinese demand.

Takeaway: Investors can again use high-quality bonds for meaningful income and portfolio diversification, but should retain selective equity exposure and protection because inflation, energy prices, fiscal risks and geopolitical uncertainty could renew volatility.