The Last Five Years Have Been Unkind To Fixed Income, But It Is time To Re-Evaluate

The lost quinquennium. 

The past five years have been painful for global fixed income, and some investor frustration is understandable. Most major fixed income segments are only just back to where they were five years ago. The culprit is clear: the inflation shock and aggressive central bank tightening cycle of 2022 left a deep performance hole that markets are still climbing out of. US IG, for example, has delivered a broadly flat return over the period. That still compares favorably with US Treasuries, where annualized returns have been modestly negative at -0.61%, and the Global Agg, where returns have been weaker still at -1.36% annualized.¹ But markets do not move in straight lines. Past performance is not indicative of future returns, and for fixed income it is probably a good thing.  Current yields may offer a more supportive backdrop than investors have seen for much of the past decade. In US IG, a starting yield of 5.54% has historically been associated with a subsequent median annualized return of 6.82%, with a range of 5.08% to 8.08%.² Put simply, yield has historically tended to be a guide to future returns. The carry cushion is also meaningful. At today’s levels, US IG yields would need to rise by around 84bp over the next year before total returns turn negative, while the cushion in US high yield is closer to 250bp.³ Finally, 2026 is not 2022. Some central banks are hiking again, but we do not expect a repeat of the long, brutal tightening cycle that defined the last inflation shock. After a lost five years, the future of fixed income appears more constructive, in our view.

We are going on a hike, at least in Europe.

September is lining up to be an important month for global central banks. Starting with the ECB, which is widely expected to raise its policy rate by 25bp this week. The main focus of the policy meeting will be on any signal about what happens next. According to Peter Goves, our head of DM strategy, the current market pricing is somewhat generous, with three hikes priced in over the next 12 months. In our view, the market may overestimate the risk of a meaningful inflation shock. Moving on to the Fed, the momentous meeting is scheduled for September 16^th. The jury is out on this one. There are indeed good arguments on both sides. The hiking camp is likely to refer to the hawkish tone delivered in Jackson Hole, the strong payroll numbers, and the idea that the Fed could deliver a hike with the goal of boosting its credibility. Indeed, nothing beats action when it comes to establishing your inflation-fighting credentials. But at the same time, there seems to be no urgency to act, and a rate move could actually introduce more confusion over the Fed’s monetary policy strategy. Besides, the ongoing inflation concerns mainly pertain to supply-side issues, some of which may be temporary in nature. This is also why some market participants believe that underlying inflation may be lower than headline readings may suggest. Against this backdrop, this week’s US CPI release will play a critical role in shaping policy expectations. A benign reading could reinforce Market Insights’ view that the Fed may remain on hold for now.  

Why have higher yields not killed the equity rally?

The answer is profits. The Fed has stayed put, but markets have not: the 10-year Treasury yield is up roughly 60 bp year-to-date. Normally, that would be a clear headwind for equities. Yet the S&P500 is up about 14%.⁴ This is not a yield-insensitive rally. It is an earnings-led rally strong enough to absorb a higher discount rate. Good economic news has also been good equity news. Higher yields can still bite, but the cause matters. An inflation-driven rise would be more damaging because it raises the risk of renewed Fed tightening and lower multiples. A real-rate move is more durable—and more equity-friendly—because it points to stronger growth and rising profits. So far in 2026, strong nominal growth, resilient margins and upward earnings revisions have offset the drag from higher Treasury yields. Higher yields still matter; they matter most when earnings fail to keep up. With the equity risk premium still historically thin, investors have little valuation cushion if estimates disappoint. But as long as earnings remain robust and revisions hold, equities can continue to digest higher yields. This may support an earnings-led approach: focus on companies where growth is real, not assumed—selected cyclicals and energy tied to stronger nominal growth, and technology firms where AI-related investment supports structural demand. In our view, the broad market can live with higher yields, provided profits keep validating the move (contribution from Ross Cartwright, Lead Strategist – Strategy and Insights Group).

1. Sources: Bloomberg. US IG = Bloomberg US IG corporate index. US Treasuries = Bloomberg US treasury index. Global Agg = Bloomberg Global Aggregate index. Returns are gross and in USD. Data as of 4 Sept. 2026.
2. Source: Bloomberg. US IG Credit = Bloomberg US IG Corporate Index. Monthly data from January 2000 through 31 Aug. 2026. Returns are gross and in USD. Past performance is no guarantee of future results.
3. Source: Bloomberg. Total Return Breakeven = yield / duration. Yields = yields to worst. Duration = Option-Adjusted duration. The breakeven shows how much yields would have to rise before 1 year of coupon income is completely offset and total return equals zero across the various maturity segments. If that breakeven number is large, it points to some cushion from a valuation standpoint. Current = 4 September 2026.
4. Sources: Bloomberg. Data as of 4 Sept. 2026.