15 Sept 2026
Equities are climbing, but bond markets are telling a different story. Chris Forgan and Caroline Shaw explain what rising yields mean for portfolios and where they still see opportunities.
There has been an unusual combination in markets over the summer. Equity markets have continued to perform well, with the S&P 500 reaching new highs and corporate earnings remaining supportive. Meanwhile, government bond yields have been moving higher, in some cases reaching levels not seen for many years.
There are good reasons behind both. Economic growth has remained resilient enough to support company earnings, while enthusiasm around AI continues to underpin parts of the equity market. In bond markets, however, investors are contending with persistent inflation risks and a substantial increase in the supply of debt.
Government borrowing remains high across a number of developed economies, while large technology companies are also becoming significant bond issuers as they finance the enormous capital expenditure associated with AI. That extra supply is one reason we believe upward pressure on longer-term yields could persist.
The manner in which yields rise can matter as much as the level they reach. A sudden spike in borrowing costs can quickly unsettle equity markets. This year’s move has been more gradual, giving investors time to look through higher yields towards still-healthy corporate earnings. That helps explain why equities and bonds have so far been able to move in a seemingly unsynchronised way.
However, the calm in equity markets at higher yields is unlikely to last forever. Higher borrowing costs eventually feed into mortgages, corporate financing, investment, and consumer spending. If yields remain elevated, they are likely to exert a greater drag on economic activity and risky asset prices.
We have therefore taken some risk off the table following strong performance this year and have become more selective about where we take equity risk.
One example is US mid-caps. We built a position earlier this year to participate in the broadening of US growth beyond the largest technology companies, and it performed well. More recently, the rise in bond yields has weakened that investment case. Mid-sized businesses tend to be more sensitive to borrowing costs, so we have exited the position and recycled some of the proceeds into larger US value companies, which we believe should be more resilient to any further rises in yields. Overall, we have brought our equity positioning closer to neutral while retaining exposure to areas where we continue to find attractive opportunities.
Emerging markets remain one of those areas, although we have also taken some profits following particularly strong returns. Importantly, trimming broad emerging market exposure reduces our exposure to the technology-heavy parts of benchmarks, particularly Korea and Taiwan, which have enjoyed exceptional performance. We continue to prefer more differentiated opportunities, including Latin America, while India and China remain interesting where domestic fundamentals and valuations are supportive.
We have made changes within fixed income too. After strong performance, we have reduced emerging market debt and increased high yield exposure. Many emerging market borrowers are vulnerable to higher energy prices, whereas high yield companies currently benefit from relatively healthy credit fundamentals and starting yields of around 7%. Its shorter duration should also make the asset class less vulnerable to rising government bond yields than many traditional bond exposures.
Alternatives continue to play an important role. We have added incrementally to gold following recent weakness. With government borrowing elevated and bonds potentially offering less reliable protection during periods of inflation pressure, gold provides a useful hedge against several of the risks currently facing portfolios. We also retain exposure to commodities, industrial metals, and alternative strategies with return drivers that differ from conventional equity and bond markets.
The message is therefore one of adapting our portfolios to evolving market conditions rather than large changes. Growth and earnings remain supportive, so we do not believe this is the time to pivot strongly into more defensive areas. Time in the market remains important.
But after a strong period for risk assets, rising yields present a new potential source of risk. We are taking profits where markets have run hard, reducing exposure to more interest-rate-sensitive areas, and broadening the sources of resilience within portfolios. That leaves us able to participate if growth remains healthy, while being better prepared should the message coming from bond markets eventually begin to register more forcefully elsewhere.
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.
UKM0926/420016/SSO/NA