With global equities performing above expectations for the first nine months of this year, conversations with clients this quarter have kept coming back to bonds. Why have they lost value again this year? Is this a repeat of 2022? What does it mean for the rest of the portfolio?
We want to address these questions directly, because while this year’s bond returns are below expectations, we don’t think they’re something to fear. In fact, we think there’s good reason for long-term investors to feel better about where things stand today than they did at the start of the year.
Interest Rates Are Up, and Bond Prices Have Fallen With Them
The 10-year U.S. Treasury yield started 2026 at 4.18% and has since climbed to 5.29% at the end of September, an increase of 1.11%.1,2 Since bond prices and yields move in opposite directions, that increase has pushed bond prices lower across most portfolios this year.
That relationship can feel backward if you’re used to thinking of a falling account value as bad news. But it helps to remember what a bond actually is: a loan. When you own a bond, you are the lender, and the company or government issuing it is the borrower. When rates rise, new loans pay more interest than old ones did, which is exactly why existing bonds — paying yesterday’s lower rate — become less valuable by comparison. The flip side is that every dollar you invest in bonds today, and every coupon payment you reinvest, may now earn more than it would have a year ago.
A simplified example using constant maturity Treasuries: A 10-year Treasury note bought at the start of the year, now facing a yield roughly 1.11% higher, has likely lost around 8.5% of its price (not accounting for the roughly 3% of interest earned over that time). However, the additional 1.11% in yield is worth roughly 11.1% in additional income over 10 years. Netting the two together, a long-term holder ends up wealthier by the bond’s maturity than if rates had never moved, despite the price decline showing up on today’s statement due to interest payments being reinvested at higher yields. This is a hypothetical example provided for educational purposes only. It does not reflect the performance of any Forum client or portfolio, does not represent actual investment results, and is not a guarantee of future performance.
These higher expected returns are true not just for bonds. Higher rates generally raise the return investors require from stocks as well, since Treasuries serve as the “risk-free” rate — the base on which other expected returns are built. For clients we work with on retirement income and long-term spending plans, this matters: Higher expected returns going forward support a higher sustainable spending rate from the same portfolio. This year’s bond repricing is not just a paper loss to endure, instead it is a real improvement in what your savings can be expected to do for you over time and what investors can spend going forward.
Is This Driven by Inflation?
The instinctive assumption is that rising rates mean investors are bracing for higher inflation. Looking at the data, that’s not really the story this year.
We can isolate this by comparing regular Treasury bonds to Treasury Inflation-Protected Securities (TIPS). The gap between the two — the “breakeven rate” — tells us what investors expect inflation to average over the next decade. For 10-year bonds, that figure has barely budged in 2026, moving from about 2.25% in January to about 2.36% at the end of September. Long-term inflation expectations remain well anchored though slightly higher.
What has moved is the real yield — the return investors demand above and beyond inflation — which has climbed from 1.93% at the start of the year to 2.93% at the end of September.3 That accounts for nearly all of this year’s increase in nominal rates. In other words, investors haven’t grown more worried about inflation — they’re simply demanding more real return for tying up their money for a decade. That’s a healthier kind of rate increase than an inflation scare would be, and it’s more consistent with an economy where growth and borrowing demand remain resilient. Very simply, investors are getting paid more to own the same asset.
The Other Side: This Is Tough on Borrowers
Every loan has two sides, and what is good for lenders is difficult for borrowers. Highly leveraged companies, homeowners financing or refinancing at today’s rates, and anyone carrying a credit card balance are all facing a materially higher cost of capital than a couple of years ago. Businesses that took on significant debt when rates were near zero can see profitability squeezed as that debt comes due and needs to be refinanced at today’s much higher levels.
This is one more reason we encourage clients to think carefully about carrying high-cost variable debt in their own financial lives during a period like this one.
What About the National Debt?
It’s been hard to miss the headlines this year: The US national debt crossed $40 trillion in August, a figure now larger than the entire US economy as measured by GDP. It’s a striking number, and a reasonable one to want explained.
Here’s the context we think matters most: The US government is not a household. A household borrows in a currency it doesn’t control and can be forced into default if it can’t pay. The US borrows in US dollars — a currency it issues itself. That distinction changes how a sovereign government’s debt problems tend to get resolved. Rather than defaulting the way an overleveraged borrower might (the kind we described above), countries that borrow in their own currency have historically worked down high debt burdens through a combination of economic growth and inflation.
The mechanism is straightforward. Government debt is fixed in nominal dollar terms. If the economy grows and prices rise, the same debt becomes a smaller share of a larger, more inflated economic pie — even if the dollar amount of debt never goes down.
We’ve seen this before. After World War II, US federal debt peaked at roughly 119% of GDP in 1946. By 1974, that ratio had fallen to roughly 31% of GDP — a decline of more than two-thirds — without the debt shrinking in dollar terms.4 This decline in the debt to GDP ratio was due in part to inflation, which eroded the real value of debt issued at lower rates in prior decades, alongside economic growth.
This doesn’t mean today’s deficit is without consequences — heavier government borrowing is one of the forces competing for the same capital that businesses and households borrow, and it likely plays some role in the higher rates we’ve discussed throughout this piece. But a $40 trillion headline number, while attention-grabbing, isn’t a household balance sheet problem, and it’s unlikely to be “resolved” the way a household’s debt would be. If history is any guide, growth and inflation working over years — not sudden crisis — are the more probable path forward.
What Should You Do About It?
Nothing dramatic. Five years ago, the 10-year Treasury yielded around 1.52% — after accounting for inflation, that left bondholders with a negative real return.5 Today’s higher yields are a considerably better deal, which is exactly why the bond math above is worth understanding rather than worrying about.
At Forum, we believe in staying broadly diversified which means at any given time, some part of a portfolio will lag the rest. That’s normal, not a sign that something’s wrong. Disciplined rebalancing lets us lean into that by adding to what’s underperforming, rather than chasing what’s already increased in price. We’ve lived through extended stretches where value stocks and international stocks lagged the broader market, and staying patient through those periods has historically shown why diversification pays off over time.
With equities having driven most of a portfolio’s returns these past several years, it’s tempting to want more of it in order to lean further into stocks and trim the ballast. But stock markets don’t move in a straight line forever, and bonds remain one of the few tools that add income, dampen volatility, and cushion many (though not all) equity downturns.
None of this is about predicting the next move in markets. It’s about managing risk, staying disciplined, and keeping your portfolio aligned with the plan we built around your long-term goals. If you have questions about how this shows up in your specific plan, that’s exactly the conversation to have with your advisor.
Sources
1 “Daily Treasury Rates.” US Department of the Treasury. https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2025. Accessed October 1, 2026.
2 “Daily Treasury Rates.” US Department of the Treasury. https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2026. Accessed October 1, 2026.
3 “Daily Treasury Rates.” US Department of the Treasury. https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_real_yield_curve&field_tdr_date_value=2026. Accessed October 1, 2026.
4 US Office of Management and Budget and Federal Reserve Bank of St. Louis, Gross Federal Debt as Percent of Gross Domestic Product [GFDGDPA188S], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GFDGDPA188S, October 1, 2026.
5 “Daily Treasury Rate Archives.” US Department of the Treasury. https://home.treasury.gov/resource-center/data-chart-center/interest-rates/daily-treasury-rate-archives. Accessed October 1, 2026.
Yield and rate figures referenced above are drawn from the US Department of the Treasury and the Federal Reserve Bank of St. Louis (FRED), and are approximate as of end of September 2026. National debt and debt-to-GDP figures are drawn from the US Department of the Treasury and FRED (Gross Federal Debt as a Percent of GDP, series GFDGDPA188S).
