Greetings and Happy September!
Riva is back to school; I’m currently attempting to revive a very burnt summer lawn, and I'm soaking up the last stretch of warm weather and iced Americano season before fall kicks in.
As I sat down at my desk this morning with Bloomberg and the Financial Times, I had two immediate takeaways:
- Wow, this coffee is incredible. Here’s what’s in my cup today—I’m a coffee fanatic; it's beyond a hobby at this point - but that’s a blog post for another morning.
- This bond market remains relentless.
We have a few big initiatives lined up this fall for our client families, but I felt this was worth spending a morning on so you understand how we are considering market shifts.
The Expectation vs. The Reality
For much of the period following 2022, the prevailing thesis among investors was that inflation would be tamed, the Fed would cut interest rates, bond yields would gradually fall, and folks would finally see relief in the form of lower borrowing rates across a variety of products—including mortgages.
Unfortunately, a few major economic forces have prevented that ideal, temperate climate from taking hold in the bond market:
- Governments keep spending money they don't have. If you lend money to a stranger, you generally demand an interest payment back to offset the risk that they might refuse to pay you back. The less creditworthy or more overleveraged the stranger, the higher the interest rate you're going to demand! While central bank policy has evolved since rates peaked post-2022, governments have continued to borrow heavily. This leads institutional lenders to say, "Listen, we can keep lending you money, but we need higher interest yields to offset our risk." The obvious solution here is for governments to rein in spending and run balanced budgets, but I won't hold my breath.
- Corporate spending on massive projects. Simultaneously in the corporate bond market, the major players in the S&P 500 are spending staggering sums of money on AI infrastructure, leading creditors to demand higher interest rates here as well.
- Geopolitical turmoil and volatile commodity prices. War and global conflicts are inherently inflationary. When regional tensions flare or shipping lanes get disrupted, the prices of essential commodities—from oil and gas to metals and food—spike. That creates supply-side shocks that keep baseline inflation stubbornly sticky. And as long as inflation threatens to stick around, bond investors insist on higher interest rates to compensate for their lost purchasing power
All three of these drivers are completely beyond the control of the everyday investor. However, markets generally move in cycles: what goes up eventually comes down, or, perhaps more accurately, what deviates from historical averages tends to revert back over time.
"Why Don't We Just Sell All Our Bonds?" - I can hear you saying!
It’s a natural reaction. But investors have to be extremely careful about how they manage their way through market shifts.
If we sold all our bonds and moved everything into cash, stocks, or alternatives—and the economy subsequently slid into a recession or worse—we may have sold low and bought high. In doing so, we would have possibly abandoned the exact asset class that typically performs best during an economic downturn.
Consider the COVID crash as a prime example:
Just before the pandemic, the 10-year Treasury yield paid just under 2%. Some argued back then that there was no reason to own bonds when yields were that low. Yet during the subsequent crash—when the S&P 500 fell by a staggering 34% in just 33 days—nearly every portfolio strategy containing bonds experienced a significantly lower drawdown than the stock market as a whole. (Fredlick 2026)
A good wealth advisor understands the principle of Loss Aversion. This is a deeply rooted psychological bias where the pain of a loss is felt roughly twice as intensely as the pleasure of an equivalent gain (Kahneman & Tversky, 1979, p. 263). This is why we generally don't recommend that clients hold 100% stocks. While equities historically build the most wealth over long time horizons, they can be exceptionally painful to live with as a human being when markets get rough.
A good wealth advisor also understands that investors are frequently afflicted with Recency Bias. This occurs when, rather than considering a complex situation and all of its variables, we take a mental shortcut and assume that whatever just happened will continue to happen indefinitely (Tversky & Kahneman, 1974, p. 1125).
To put it in everyday terms:
Imagine you have eaten pizza, avoided gymnasiums, and actively hissed at salads for the last eight years. Then you go to a spin class on Tuesday, drink a green smoothie on Wednesday, and walk to work on Thursday. On Friday morning, you look in the mirror and genuinely wonder why you don't have six-pack abs and a fitness sponsorship yet.
In the investing world, recency bias sounds like this: "Stocks will keep falling forever, so I should sell everything," or "Interest rates will keep rising, so sell all your bonds," or "Stocks only go up, so let's buy even more!"
Investing is easy. Being human is hard - Carl Richards
Putting It All Together
So, what does all of this mean when thinking about bonds?
One important consideration is duration, which measures a bond’s sensitivity to changes in interest rates. Generally, bonds with longer durations are more sensitive to changes in interest rates than bonds with shorter durations. When rates rise, longer-duration bonds will typically experience larger price declines, all else being equal. The bond market in 2022 provided a particularly visible example of this relationship.
Shorter-duration bonds generally have less interest-rate sensitivity. Because their principal is expected to be returned sooner, changes in prevailing interest rates typically have a smaller effect on their market value than on otherwise comparable longer-duration bonds.
Bond strategies can also differ significantly in their duration, credit quality, underlying securities, and investment approach. These characteristics can cause different types of bond investments to respond differently to changes in interest rates and economic conditions.
The important takeaway is that the term “bonds” encompasses a wide range of investments with different characteristics and risks. Changes in interest rates can affect each of them differently, which is why understanding the underlying characteristics of a bond investment can be more informative than looking at the fixed-income market as a single asset class.
The Good, The Bad, and The Balance
The Good: Higher interest income. As older bonds mature, funds reinvest at today's higher rates. That translates directly into higher cash payouts flowing into your money market account.
The Bad: Bond prices fall as rates rise. However, this impact hits hardest in long-maturity bonds—the exact instruments investors want to try to avoid right now.
The Balance: How much the "good" outweighs the "bad" depends on how sharply the market moves.
A Final Thought
It’s important to state clearly: no investment strategy can guarantee perfection or protect against all loss. Market movements are inherently unpredictable, which is why we favor slow, defensive adjustments over sudden market-timing gambles. The moment an investor zigs based on recent headlines, the market has a habit of zagging.
If you are seeing headlines about the bond sell-off that are making you uneasy, let’s talk!
References:
Fredlick, Emelia. 2026. "The 60/40 Portfolio: A 150-Year Market Stress Test." Morningstar, March 19, 2026. morningstar.com.
Tversky, Amos, and Daniel Kahneman. 1974. "Judgment under Uncertainty: Heuristics and Biases." Science 185 (4157): 1124–31. doi.org.
Kahneman, Daniel, and Amos Tversky. 1979. “Prospect Theory: An Analysis of Decision under Risk.” Econometrica 47 (2): 263–292. doi.org
Important Regulatory Disclosures & Compliance Information
- Educational Commentary: This publication is for educational and informational purposes only and reflects the general market commentary and opinions of the author. It should not be construed as individualized investment, financial, legal, or tax advice, nor as a recommendation or solicitation to buy, sell, or hold any specific security or pursue any particular investment strategy.
- Risk & Performance Disclosure: Past performance is no guarantee of future results. All investments involve risk, including the possible loss of principal. Asset allocation, diversification, and active duration management strategies do not ensure a profit or protect against loss in declining markets. All investing involves risk, including the possible loss of principal. Bond prices generally move inversely to interest rates, and bonds and bond funds are subject to interest-rate, credit, and other risks.
- Illustrative Fund References: References to specific asset classes, indices, or financial instruments (such as the Vanguard Long-Term Bond Index/BLV, 10-year Treasury notes, or short-term bond metrics) are provided solely to illustrate broader market concepts and duration mechanics. They do not constitute an endorsement, solicitation, or personalized investment recommendation.
- Yield & Income Estimates: Yield figures (including the ~4% figure cited for short-term bond instruments) represent market conditions at the time of publication and are subject to change based on interest rate fluctuations, distribution adjustments, and underlying fund performance.