Fixed income sector review – can bonds earn their place in portfolios again?

Global bond yields have continued to rise so far this year. Mainly driven by expectations of more persistent inflation, deteriorating government finances, as well as some other structural factors. It means yields on government debt in many countries across the developed world are at their highest level in almost two decades. For instance, the yield on 30-year US Treasuries stands at 5.2% and the UK equivalent – the 30-year gilt yield – has topped 5.8% as I write in early September 2026.

But should investors embrace this as an opportunity for bonds to feature more heavily in portfolios, or shy away from an asset class that has largely struggled in the post-Covid era?

Inflation is a concern

At the start of the year, many investors expected central banks to cut interest rates as inflation began to subside towards the generally accepted 2% target. Instead, price pressures have continued to rise, driven by escalating energy prices and supply disruptions caused by the US-Iran conflict. 

Economic growth has also been solid – notably in the US – which has reduced fears of recession, added to price pressures, and pretty much eliminated the chance of interest rate cuts in the near term.

Inflation is the arch-enemy of bond investors as it erodes the spending power of future fixed income payments. In a higher-inflationary world, investors demand a higher yield to compensate them – and that means lower prices. But that is far from the only factor at play.

Government borrowing is a worry

Many governments across developed economies continue to run large fiscal deficits (they spend more than they receive in taxation and other revenues). To help plug the gap, they issue debt through selling bonds – additional supply that must then be absorbed by the market. As the supply of bonds increases, yields may need to be higher to attract buyers – all else being equal.

Bond investors are increasingly nervous about the rising quantity of global government debt. This is especially the case for longer-dated bonds where there is a greater perceived risk of not being appropriately compensated for inflation and uncertainty around future government policy. 

This can make things worse for governments as higher bond yields mean greater costs for any new debt issued, potentially adding tens of billions to annual interest payments and making the fiscal position even shakier. Issuing more shorter-term debt might ameliorate the situation for a while, but that increases the amount that needs refinancing later unless the debt is paid down.

Find out more: Why Britain’s debt problem matters to you

Structural factors at play too

There are also structural changes happening within bond markets. Traditional buyers of bonds – such as pension funds who purchase with a view to meeting long-term liabilities – are typically a diminishing part of the market. Instead, more price-sensitive buyers are increasingly dominant in market flows, including hedge funds and private investors.

A significant new factor is the huge financing requirement for AI infrastructure. Technology companies are issuing vast quantities of debt to fund data centres, hardware and power infrastructure, which can compete with governments for investor capital. More demand for capital tends to mean higher interest rates across markets as a whole.

So, are bonds still a valuable part of a portfolio?

Historically, bonds have often been a good hedge against shares in a portfolio. Disappointing growth that led to an equity market downturn tended to have a positive impact on bonds if inflation and interest rate expectations were simultaneously downgraded. 

However, that handy diversification is less effective in some scenarios, especially for longer-dated debt. A growth shock could effectively make any fiscal imbalances appear more precarious and increase the premium investors demand for locking into a fixed return for a long time.

Nonetheless, at present, the higher fixed return on offer over the course of the investment – known as ‘carry’ – acts as a partial shield from loss for bond investors, at least in nominal terms. To put it another way, if yields continue to rise and bond prices fall, this is offset by the mechanical return from the bond’s yield.

This is why some experts feel that bonds offer a beneficial ‘asymmetric’ trade – more opportunity for good returns than there is risk to the downside. Indeed, we may now be reaching the point where bond yields are sufficiently high to entice more moves out of cash from those that have been waiting on the sidelines wary of volatility.

In recent years, it has been the less inflation-sensitive ‘lower duration’ parts of the bond market that have been most resilient. That would continue to be the case if longer-term yields ratchet higher still. Yet, an opportunity could be emerging to lock into higher quality and longer-term debt at attractive levels of return if governments make renewed commitments to fiscal discipline. 

Meanwhile, in non-government debt markets, investors have been broadly rewarded for taking on credit risk. Higher yield corporate bonds have compounded stronger returns from their higher yields while company defaults stayed low. Again, this is something that could flip around in a less rosy economic scenario where riskier credit underperforms as defaults rise.

Recent fund performance

Here's how the actively-managed funds in the fixed income sector on the Charles Stanley Preferred List got on over the past year, as well as in previous periods, with brief commentary on each fund detailed below.

Before investing, it’s important to read the fund’s Key Investor Information Document (KIID) to understand the risks involved and ensure the investment aligns with your risk tolerance and investment objectives.

Performance of fixed income funds on the Charles Stanley Direct Preferred List and their respective sectors 

Past performance is not a reliable indicator of future returns. Figures are calculated in £ on a % total return, bid -to-bid price basis with net income reinvested; Source: FE Analytics, data to 31/08/26.

Rathbone Ethical Bond

This corporate bond fund has been managed by Bryn Jones since 2004. He aims to build a portfolio of good-quality, sterling-denominated investment grade bonds, avoiding the riskiest ‘high yield’ bonds. The manager also applies a broad range of both positive and negative environmental, social and governance (ESG) screening criteria that could appeal to those with ethical priorities.               

The fund is typically focussed at the more adventurous end of investment grade bonds, with a skew towards the higher yield part of the market and a bias to banks and insurers. It has tended to offer a yield premium over other funds in its sector as a result, though past performance isn’t a guide to the future.

Given the very complex environment, Jones doesn’t want to chase yield by taking on too much credit risk. Duration – a measure of interest rate sensitivity – is about average for the sector at around six years.

The fund’s ethical aims are achieved via a combination of screening out unacceptable business practices, and lending money to companies or organisations that have a tangible positive impact on society or the environment.

Raymond James REAMS Unconstrained Bond

When there is significant volatility in bond markets, a flexible approach can help navigate the pitfalls and maximise the potential of the asset class. That’s the goal of this fund managed by a specialist bond team based in Indianapolis, Indiana. 

The managers aim to be highly flexible and opportunistic, with their interpretation of the macroeconomic environment expected to be the primary driver of performance. There is no regard to any index or competitor benchmark, meaning the managers are free to invest in bonds from across the globe in the best way they see fit for the prevailing environment. The team are also prepared to forego income in pursuit of long-term overall returns, taking risk only when they believe appropriately compensated to do so. However, the more complex and dynamic nature of the fund can at times add to the risks for investors.

Presently, the managers believe the market is moving into a more uncertain environment where inflation may prove sticky, growth could slow, and geopolitical risks could keep volatility elevated. Despite this, they consider that longer-term yields now offer a reasonable buffer and are happy to maintain some interest rate sensitivity.

Rather than betting on falling rates, they are positioning to exploit relative value across fixed income sectors, including selected mortgage and emerging market debt where valuations have become more attractive.

Schroder Strategic Credit 

This fund flexes its allocation between the bottom end of investment grade bonds and the top end of the higher risk, high yield market, known as ‘crossover’ credit. The exposure to sub investment grade bond results in extra yield over investment grade funds which can compensate investors for the increased default risk and typically reduced liquidity. 

While the fund can invest in US credit, the team’s expertise is in the European markets and therefore focused on the UK and Western European issuance. Given the credit risk taken on, there is less sensitivity to interest rates than with funds investing more in higher quality parts of the market, which has led to resilience over the past year. 

The portfolio is currently over 50% allocated to industrial names with financials also held in significant size. 

Vanguard Global Credit Bond     

This actively-managed fund employs a highly risk-controlled approach to investing globally in mainly investment grade corporate bonds. Although best known for its passive strategies, the US fund group is also one of the largest active fixed income managers in the world and is resourced accordingly. We believe a deep and experienced team is essential for this type of approach, which is hunting for the most compelling ideas across a very large universe.

It was a characteristic year of steady performance for the fund, although past performance should not be taken as a guide to the future. The managers do not take large bets in terms of geography or interest-rate sensitivity, instead seeking gradual outperformance through individual bond selection. This does mean it can carry a higher level of interest rate sensitivity and risk, though.

The portfolio is currently biased towards UK corporate names and other parts of Europe. Positioning is also defensively tilted, favouring financials over non-financials and less economically sensitive areas more generally, particularly European banks and UK utilities.

We see this fund as a possible building block for investors who prefer straightforward exposure to the asset class, rather than a strategic, flexible or global bond manager that aims to move around the fixed interest spectrum more aggressively in search of outperformance.

Wellington Global High Yield Bond

High yield bond funds can sometimes be useful to bring something different to a portfolio. For instance, as well as providing a higher yield than safer, investment grade bonds, they react differently to changing economic circumstances. They are more likely to be resilient in a strong economic environment where company bankruptcies are falling, whereas the threat of higher inflation and interest rates in these circumstances may have a greater negative effect on government bonds and other bonds with lower yields.

High yield debt is a complex asset class where thorough research combined with prudent risk management can add significant value. There can be lots of pitfalls with the biggest components of indices often the companies with the largest amount of debt rather than any other determinant of size. We therefore generally prefer an active approach as opposed to a passive strategy of buying the market.

This fund offers straightforward and diversified high yield exposure and is currently defensively positioned in the context of its sector. The managers believe security selection will take on increased importance moving forward, with emphasis on the better-quality businesses in their universe with resilience to higher costs. From a country perspective, they maintain an overweight to North America against an underweight to emerging markets.