2026 has been an eventful year in the global fixed-income markets, with many catchy headlines often describing it as “unprecedented” or “generational.” However, when looking under the hood, we see more rational developments and, perhaps, even a normalization of market forces at work. To understand where we currently are, it is important to understand how we got here.

The bookends of the previous decade were marked by two unique global phenomena—the Great Financial Crisis (GFC) and the COVID-19 pandemic. Moreover, the fiscal and monetary reactions to both of those crises were similar—fiscal stimulus, looser financial conditions, lower interest rates, and widespread use of debt to help stave off further economic deterioration. McKinsey estimates that global sovereign debt doubled between 2008 and 2018, and the Tax Policy Center estimates that government intervention during the COVID pandemic added over $5 trillion to the U.S. national debt. The second- and third-order effects that stem from such disruptive periods can never be precisely quantified, but suffice it to say, there is no free lunch.

The significant increase in debt and spending—plus the lack of economic activity—from the COVID era ultimately resulted in inflation, which the Fed finally began fighting in March of 2022. In a little over a year, the Fed raised its policy rate from essentially zero to over 5%. This rather severe and abrupt increase in interest rates caused quite a few troubling cracks in the system—including the failures at Silicon Valley Bank and First Republic Bank—and, in turn, this all resulted in both stocks and bonds posting double-digit negative returns in the same year, 2022, the first and only time that this has happened. 

There are a few key takeaways from the last 20 years that can at least partially help explain how people in general are perceiving the bond market today.  First, investors, homebuyers, and consumers had become psychologically accustomed to abnormal and unsustainably low interest rates for over a decade. Second, the sovereign and private debt that was incurred during those last two crises did not simply vanish, and instead it is contributing to the global fixed-income supply glut that we are seeing today. In addition to the impact of these historic trends, this year has brought a few additional curveballs, too, including a new Fed Chair who prefers obfuscation over clarity, and a geopolitically driven energy crisis which caused oil to reach as high as $126 per barrel.  

Despite the U.S. 10-year yield rising from just a little over 4% at the start of 2026 to 5.3% by the end of the third quarter, the 10-year breakeven rate (the market’s estimate of forward-looking inflation) was still only hovering around 2.3% at the end of September.  This is not materially far from the Fed’s 2% inflation target, nor is it reminiscent of the underlying conditions that led to the post-COVID 2022 rate-hike cycle described earlier. Ironically, there are “good” reasons why yields have increased this year. The U.S. economy has exhibited above-trend economic growth, the labor market has been stable, corporate earnings have seen double-digit growth, and there has been significant investment coming from the AI supercycle spending. Indeed, all of these factors suggest that the neutral rate—the rate that neither stimulates nor restricts the economy—should be relatively higher.

Importantly, the inherent dynamic of supply and demand has been the other major factor contributing to higher yields. The demand for capital (or supply of debt) has never been higher. Sovereign debt levels have significantly increased in the last few decades to levels not seen since WWII. Furthermore, the demand for private capital has significantly increased due to the massive wave of AI investment. Goldman Sachs estimates that so far, non-sovereign AI-related debt issuance has hit $500 billion in 2026 alone. There is a glut of supply, and hence, it is not only normal but healthy for investors to demand adequate compensation for their investments. Excess supply in and of itself should not be viewed negatively. Markets are never in perfect equilibrium. There are certain environments that benefit buyers and certain environments that benefit sellers, and right now, buyers of bonds have the advantage.

The bottom line for your portfolio is that bonds are finally providing a compelling risk-return profile after years mired by low interest rates and the pain caused by the readjustment (or normalization) of those rates. Following pronouncements of the death of the 60/40 portfolio at the start of this decade, higher starting yields are now making fixed income not only an increasingly attractive source of diversification for portfolios, but also an important asset class that should meaningfully contribute to overall portfolio returns going forward. The new market environment in 2026 may not be a new normal at all, but simply a return to normal.