Speed read
Government bond prices have fallen, but that does not mean fixed income is broken. Different parts of the bond market are responding to different risks – exactly as we should expect them to. And while the headlines have focused on falling prices, the returns tell a quieter story. Across the US bond market, prices are down about 3% so far in 2026, but the interest those bonds paid out has covered most of that, leaving investors down under 1% in dollar terms. In 2022, the same sort of shock cost investors 13%, because bonds were paying almost nothing when it hit. Today, yields across many parts of the bond market are materially higher. That income provides a cushion investors simply didn't have going into 2022.
Key takeaways
- Bond prices have fallen this year, but the interest bonds pay has absorbed most of the fall. Across the US bond market, prices are down about 3% while investors are down less than 1%. In 2022 the same sort of shock cost 13%.
- The word “bonds” covers several very different markets. This year, bonds issued by riskier companies and by developing countries have made money, while the longest-dated developed market government bonds have fallen.
- Bonds now pay more interest than they have in twenty years. The interest on offer when you invest is the best available guide to what a bond investment delivers over the long run, and it has rarely been this generous.
What the headlines are actually about
The sell-off is real. It is also narrower than it sounds.
The pressure sits in one place: government bonds that will not be repaid for another twenty or thirty years, in a handful of wealthy countries. The interest rate on 10-year UK government bonds reached 5.25% at the start of September, the highest since 2008. Germany’s reached 3.35%, the highest since 2011. Japan’s touched 3.00% for the first time since 1996.
There isn't one cause. Higher energy prices have renewed inflation concerns, governments are issuing more debt and investors are reassessing how quickly interest rates might fall. The common result is that investors are demanding a higher yield to own long-term government bonds.
When there are more bonds for sale and fewer buyers queuing up, prices fall and the interest rate on offer rises. That is the market working as it should.
The interest is doing the heavy lifting
Owning a bond gives you two things. The price it trades at, and the interest it pays you while you hold it. Headlines only ever cover the first while investors actual return is the combination of both.
In USD terms this year, the US bond market has fallen about 3% in price terms. Over the same period it has paid out more than 2% in interest already. As a result, Investors are down less than 1%. Compare that with 2022. Prices fell 15%. Interest paid was only 2% over the whole year. Investors finished the year down 13%.
Prices fell in both years. What changed is how much the bonds were paying when the trouble started.
Chart 1. US bond market, price change against what investors actually received. All figures in US dollars.
The same shock, a different starting point
2026 rhymes with 2022. Conflict, an energy shock, inflation back in the news, no clarity on where interest rates go next.
What has changed is what you are paid to hold on.
At the end of 2021, 10-year US government bonds paid 1.51% a year. The 30-year paid 1.92%. Almost nothing was coming in to offset a fall in price, so when the fall came, investors took it on the chin.
Today the 10-year pays overs 4.5% and the 30-year over 5%.
Chart 2. What US government bonds paid at the end of 2021, and what they pay now. These are dollar bonds, and a yield is not affected by exchange rates.
Two things can be true at the same time. A fall in bond prices is uncomfortable, but price movements are only one part of the return investors receive. The interest paid by bonds provides a cushion against those falls, meaning bond prices can fall while an investor's total return remains positive. And ultimately, it is total return that matters.
Which bonds?
“Bonds” gets used as though it describes one thing. In fact, it covers lending to governments, to large and financially solid companies, to weaker companies, and to developing countries. Those four can behave very differently because their dominant risks are different
Take this year, with the same events hitting every market at once. Bonds issued by riskier US companies, the sort known as high yield, are up 2.03%. Government bonds from developing countries are up 1.16%. Bonds from large, solid companies worldwide are down 0.84%. And the long-dated government bonds filling the headlines have fared worst of all.
Chart 3. 2026 Year to Date Returns, by type of bond, based on representative index funds. All returns in US dollars
These are all bonds. They behaved differently because they carry different risks. Government bonds move mainly on inflation and interest rate expectations. Bonds from strong companies add the health of that company into the mix. Bonds from weaker companies depend mostly on whether those companies keep up their payments, so they behave more like shares during a scare and care far less about the inflation figures and interest rates. Bonds from developing countries add politics and currency on top of all of it.
Understanding those different risks - and combining them deliberately - is an important part of building a diversified portfolio.
Why shares and bonds fell together
The other worry is that bonds have stopped protecting portfolios, because shares and bonds have fallen at the same time.
They have. In this sort of shock, that is what should happen.
Research published by the investment firm AQR in 2023 explains why. When the news is about growth, shares and bonds tend to move in opposite directions, which is the protection investors are looking for. When the news is about inflation, they tend to move the same way. AQR’s model accounts for roughly 70% of how the two have moved together over the long run.
So an inflation shock pushes both down. It is when the economy weakens, and the worry shifts from prices to jobs, that government bonds have historically done the protecting. The higher rates on offer today leave more room for them to do it.
Diversification means owning things that respond to different pressures. It has never meant owning things that move in opposite directions every single day.
What this means for you
Nobody can tell you where inflation or interest rates go next. It is harder than it looks, too, because markets have already priced in what they expect. Inflation of 4% is bad news if markets were expecting 3%, and good news if they were expecting 5%. Getting the economics right is only half of it. You would also have to be right about the surprise.
The interest a bond pays is different. You can see it today.
Janus Henderson looked at how well that starting rate predicted what bonds went on to deliver. Over a single year, the link was weak. Over five years, it was strong.
Chart 4. How closely the interest on offer matched the return that followed. Each market measured in its own currency, the European ones in euros and the US ones in dollars.
None of which means interest rates have peaked, and none of it is a signal to do anything. What it does mean is that the income on offer is higher than at almost any point in the past twenty years.
So here is where things stand, in plain terms. Bond prices have fallen, and that is uncomfortable to read about over breakfast. Your money in bonds is now earning more interest than at any time in the last 30 years. Almost the whole of this year’s price fall has already been covered by the interest arriving in the portfolio. And the part of the market that commentators keep describing as broken has quietly done close to what you should expect it to do.
Bonds aren't broken. They are responding to the environment exactly as we would expect. What matters is understanding which bonds you own, what risks are driving them and what you're being paid for taking those risks.