Managing inflation and yield curves in bond markets

We’ve made targeted changes to bond allocations in response to ongoing inflation uncertainty, muted yield curve steepness, and the attractive value in real yields.

Why we’re acting: inflation and yield curve dynamics

• Inflation remains above target with longer term risks.

Although in the near-term inflation is moderating, yield curves are not steep enough in our view to compensate for longer term inflation risk. Inflation appears to be a lot more vulnerable to shocks in the current environment, particularly those from the supply chain.

Investors may not be appreciating how much these dynamics have changed and could be too focused on a return to the benign environment between the Global Financial Crisis and the Covid-19 pandemic.

Portfolio actions: what we’re changing and why

• Maintaining short duration: we are keeping portfolio duration shorter. This helps manage downside risk if inflation persists or re-accelerates.
• Increasing inflation-linked exposure: allocations to UK index-linked gilts and US TIPS (Treasury Inflation-Protected Securities) are being increased, especially at the short end of the curve. Real yields are now more attractive, offering better inflation protection.
• Selective global government bonds: within global government bonds (GBP hedged), we favour US Treasuries, and European government bonds for diversification, while avoiding regions with higher geopolitical or credit risk.

Shorter duration and inflation-linked assets help portfolios remain resilient against inflation surprises and rate volatility. Inflation-linked bond yields are attractive, especially at the short end, supporting portfolio returns in real terms.

Outlook

Diversification is a key tool when it comes to positioning in bond markets. That goes beyond thinking by region, duration and credit quality. The balance between nominal bonds and real bonds is something that we believe will be increasingly important in 2026 and will be an area we continue to watch with interest.

Next steps to consider

If you have any questions about how these changes affect your portfolio, please contact your Investment Business Development Manager.

For deeper insight into our 2026 asset allocation approach, download our latest brochure.

The value of investments can go down as well as up and your client may not get back their original investment.

Past performance is not a guide to future performance and some investments need to be held for the long term.