21 Oct 2026
Higher bond yields are creating more attractive opportunities, but the backdrop remains uncertain. Chris Forgan and Caroline Shaw explain why they remain cautious on government bonds and where they continue to see value across markets.
For much of this year, we have been cautious on government bonds. That view has served us well as yields have climbed, but it also presents us with a new question. After such a significant repricing, when does caution give way to opportunity?
We are not quite there yet, although the decision is becoming more finely balanced. Bonds offer considerably more attractive prospective returns than they did earlier in the year, and real yields have reached levels that deserve attention. For now, however, we think there are still good reasons to maintain our underweight.
Part of the challenge is that several forces are pushing in the same direction. Economic activity continues to hold up well, while the inflation picture has become less comfortable. Higher oil prices are an important part of this, given the continued uncertainty in the Middle East, but recent inflation and business survey data also suggest that price pressures warrant watching more closely.
Meanwhile, central banks are increasingly debating further tightening rather than easing, and bond markets are having to absorb considerable new issuance. That includes corporate borrowers, with large technology companies raising significant amounts of capital to finance AI-related investment.
For now, the likelihood of further price pressure across fixed income markets remains, and hence together, these factors leave us reluctant to increase our sensitivity to interest rates just yet.
The hurdle for adding duration is getting lower as yields rise. There are a few developments that could persuade us that the balance of risks has shifted sufficiently.
One would be better news on inflation. We are watching closely to see whether recent pressures remain largely associated with energy, commodities, and specific supply constraints, or become more persistent across the wider economy. Evidence that the former is proving true would make the outlook for bonds considerably more attractive.
A meaningful improvement in the situation in the Middle East could have a similar effect. Lower geopolitical tension would potentially take some pressure out of energy markets and reduce one important source of inflation uncertainty.
Price itself matters too. If yields were to rise significantly further, the prospective returns available from government bonds could become sufficiently attractive to compensate us for the risks. We therefore remain underweight duration, but increasingly alert to the possibility that an opportunity may emerge.
Our caution on bonds does not translate into a negative view of markets more broadly. The other side of the current environment is that economic activity remains healthy and corporate profitability has generally held up well.
Within equities, technology has again performed strongly, helped by the continued strength of earnings associated with AI investment. We retain exposure here, although we remain conscious of how much performance across global markets now depends on the theme. That extends into emerging markets, particularly Korea and Taiwan, where technology has become an increasingly important component of index returns.
Emerging markets remain one of our preferred equity regions, but we have reduced some of our exposure to the broad index following a strong run. We are also looking for a wider range of opportunities within the asset class, including Latin America. This allows us to retain our positive overall view while reducing our reliance on the areas that have already performed particularly strongly.
China is another market where we continue to find selective opportunities. We are not taking an especially strong top-down view, but valuations among some high-quality companies are increasingly interesting, giving active managers opportunities to build exposure at attractive prices.
Europe, by contrast, has become somewhat less appealing. There had been encouraging signs in both economic activity and company earnings, but the region's greater sensitivity to energy costs remains a disadvantage in the current environment.
Our approach to portfolio resilience also extends beyond government bonds. We continue to prefer a meaningful allocation to alternatives, including macro strategies that can generate returns from a broader range of market movements rather than depending on falling bond yields.
Gold is another example. Rising real yields have contributed to recent weakness in the metal, but we used that fall to add to our position. We continue to believe it offers useful diversification against geopolitical uncertainty and longer-term concerns around government finances, even if the current rates environment can periodically work against it.
Within credit, we are also finding that the headline view does not tell the whole story. High yield contains attractive opportunities for active managers prepared to analyse individual issuers rather than simply buying the market. That makes security selection particularly important when valuations across fixed income are uneven.
The bond sell-off has therefore brought us closer to a potential turning point, but we do not think we have reached it yet. Better inflation news, an easing of geopolitical pressures, or simply still more attractive valuations could change that assessment.
For now, we remain cautious on duration while maintaining exposure to areas where growth and earnings remain compelling. Crucially, we also retain the flexibility to change course. Markets have moved a long way this year, and some of the opportunities created by those moves are starting to look increasingly interesting.
Important information
This information is for investment professionals only and should not be relied upon by private investors. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific shares/investments is not a recommendation to buy or sell. The Fidelity Multi Asset funds use financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The investment policy of these funds and portfolios means they invest mainly in units in collective investment schemes. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between government issuers as well as between different corporate issuers.
UKM1026/420145/SSO/NA