Mim investment strategy insights higher bond yields limited stress

MULTI-ASSET | SEPTEMBER 2026 Author

Investment Strategy Hani Redha, CAIA Global Multi-Asset Portfolio Manager

Insights: Higher Bond Yields, Limited Stress About this Report Our team believes that not only do differences of opinion make markets, but they may also foreshadow substantial moves ahead as these differences are resolved. Once a month, investment leaders from our global multi-asset, equities, and fixed income teams meet to share their diverse viewpoints. This report reflects those discussions and debates by providing insights on the topic of the month along with snapshots of our asset class views and convictions across the firm.

Higher bond yields have re-emerged as a central market discussion, prompting investors to reassess implications across asset classes. Yet, the current environment is best viewed as a continuation of a secular post-pandemic normalization rather than an aberration that will reverse. Sovereign yields have been trending higher globally for several years, and while concerns around fiscal sustainability frequently dominate headlines, there is little evidence that the move we have seen has been due to these recurring concerns.

The recent move in yields has often been framed as a referendum specifically on U.S. fiscal deficits. While fiscal concerns remain relevant, there is increasing evidence that the story is broader than any single country. Long-end yields have risen across much of the G10, including countries with very different fiscal trajectories. At the same time, market pricing has shifted substantially from expecting policy rate cuts to pricing the possibility of additional central bank tightening. This repricing of interest rate expectations appears to explain the lion’s share of the move in long-end yields, which makes it far less problematic than the financial press typically conveys.

Recent remarks from Fed Chair Kevin Warsh at Jackson Hole reinforced the view that financial conditions are not currently restrictive and that labor market conditions remain consistent with full employment. While the Fed remains committed to its 2% PCE inflation target, Warsh emphasized that the speed at which inflation returns to target matters, suggesting that policymakers remain concerned that disinflation is proceeding too slowly. As a result, markets have increasingly shifted toward a higher-for-longer policy outlook, given the emphasis on the inflation side of the Fed’s dual mandate. From this perspective, the recent move in yields appears driven not only by term-premium normalization but also inflation, which in turn is being driven by temporary supply shocks. For markets, it is also critical to recognize that this is happening in parallel with robust growth.

The global picture offers additional context. In Japan, rising yields reflect the end of the deflation era, which will warrant higher policy rates—quite a contrast to the Bank of Japan’s bizarre experimentation with negative interest rates, which only ended in 2024. Europe faces a different set of challenges, with significant structural growth concerns and fiscal pressures. Meanwhile, China continues to represent the largest source of global growth uncertainty. These divergent dynamics suggest that the rise in yields is not solely a U.S. phenomenon, but rather part of a broader reassessment of growth, inflation and policy expectations across developed markets.

One of the more surprising features of the current environment is how little economic stress has emerged despite the rise in borrowing costs. Within credit markets, spreads remain very well-behaved, supported by strong technical demand and attractive all-in yields. Pension funds and other yield-focused investors continue to provide a stable source of demand, while higher yields themselves help support tighter spreads. Importantly, corporate fundamentals remain resilient. Interest coverage ratios remain at sustainable levels, and the feared wave of defaults that many anticipated following the post-pandemic rise in rates has largely failed to materialize. Our analysts are sanguine about the impact on corporate fundamentals from current levels of bond yields.

Equities have shown a similarly muted…