Equities Have New Competition From Fixed Income

For most of the past fifteen years, bonds paid very little. If you wanted a real return on your savings, stocks were essentially the only path. That has changed. Corporate bonds now yield five percent or more several years out, while stocks are still trading near record highs. For the first time in a long stretch, bonds are a real option again, not just a place to sit while you wait for something better.

It has been a hard year for the typical bond portfolio. The Bloomberg U.S. Aggregate Bond Index, the standard most people use to measure their bond holdings, is down about one and a half percent year to date. A standard 60/40 portfolio is still positive for the year, but that is almost entirely because of stocks. Bonds have not done the job they are supposed to do.

Since rates bottomed coming out of the pandemic, we have kept the bonds in client portfolios short, generally maturing in two to four years, rather than reaching further out the curve for a bit more yield. That decision helped this year.

There is a lesson in that beyond just this year's numbers. Bonds are supposed to help support your portfolio when stocks fall. That holds true when rates are steady or falling. It stops holding true when rates rise, because longer bonds lose value for much the same reason stocks struggle in that environment, tighter money supply, and higher discount rates on future earnings. Shorter bonds barely feel that pressure.

The Fed raised rates again this month, and bond yields moved with it. Investment grade bonds are paying above five percent even at short maturities, and closer to six percent further out. With stocks still near record highs, this is a reasonable time to ask whether your portfolio should hold more in bonds than it has in recent years.

For clients who want more yield without taking on more rate risk, there may be a middle option. Instead of extending maturities, we may consider modestly lower credit quality while maintaining shorter maturities, potentially capturing additional yield from credit spreads rather than taking on additional duration risk. That approach may help reduce interest-rate sensitivity if inflation remains more persistent than expected, as shorter-duration bonds are generally less sensitive to changes in interest rates than longer-duration bonds.

This isn’t an argument against stocks. Markets tend to be rational over time, even when they do not feel that way day to day, and the case for equities is stronger than the index level alone suggests. The S&P 500 has spent much of this year near record highs, but earnings growth drove that, not a richer multiple. The forward price to earnings ratio has come down, from the 22x a year ago to around 18x today and offers attractive profit growth. As fixed-income yields move higher your portfolio manager is actively considering how to best position your portfolio.

Data sources: Bloomberg U.S. Aggregate Bond Index and 60/40 portfolio returns, mid September 2026 (Bloomberg, PortfoliosLab). Investment grade corporate bond yields, September 14, 2026 (Raymond James Weekly Rate Monitor). U.S. Treasury yields, September 17, 2026 (Trading Economics). S&P 500 forward P/E and earnings growth estimates, September 11, 2026 (FactSet Earnings Insight).

 

Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.