Bonds are getting thumped as yields surge. Here’s what it means for the 60/40 portfolio
Investors are facing volatile times in the stock market, but as of late, even safe-haven Treasurys are selling off, raising questions about what’s next for the balanced portfolio. On Wednesday, investors in a balanced allocation that’s 60% weighted toward equities and 40% in bonds saw declines on both sides of the portfolio, with the S & P 500 dropping 0.7% while the 10-year Treasury yield surpassed 5.1% for its highest level since 2007. Yields and prices on bonds move in opposite directions. To that end, the iShares Core 60/40 Balanced Allocation ETF (AOR) dropped 1% in Wednesday’s trading. AOR YTD mountain The iShares Core 60/40 Balanced Allocation ETF (AOR) in 2026 Despite this latest bout of turbulence, investors with long-term time horizons ought to think twice before tearing up the rulebook on the balanced portfolio. “Long live the 60/40 portfolio,” said Brad Collins, senior fixed income client portfolio manager at Vanguard. “It got a lot of heat in 2022, and it has been redeemed in the past three years. We owe it to the restorative power of yields in the bond market.” Not like 2022 Investors last grappled with losses on both sides of the balanced portfolio in 2022 when the Federal Reserve embarked on its last rate-hiking cycle to tame inflation. From March 2022 to July 2023, central bank policymakers lifted the federal funds rate from a range of 0%-0.25% to 5.25%-5.50%. The AOR ETF tumbled about 17% in 2022 alone. “If you owned a 60/40 portfolio, you got hit by a double whammy of high yields and lower [performing] risk assets,” said Lotfi Karoui, multi-asset credit strategist at Pimco. “That left a lot of scar tissue.” But today’s higher rate environment – and the resultant slide in bond prices – isn’t the same now as it was then. “The starting point in 2022 is dramatically different from today,” Karoui added, noting that the 10-year Treasury yield’s ascent to 5% is “incremental” compared with the runup in yields four years ago. Today’s higher starting yields provide some protection against falling prices. “Income is the important component here,” said Steve Laipply, global co-head of iShares fixed income ETFs. “Income itself can be a powerful diversifier and a nice cushion building in your portfolio.” A checklist for the 60/40 investor While bonds are an attractive buy for long-term investors in diversified portfolios, they should still be mindful of the holdings in their fixed income allocation. For starters, long-dated bonds will still take their lumps as rates continue to rise – and they’ll be more likely to see falling prices. That’s because they have greater duration, which is a measurement of bonds’ price sensitivity to rate fluctuations. “If you are in long duration bonds, you could still see losses if rates continue to climb, but on the short- and intermediate-term end of the yield curve, you should be relatively safe from future interest rate hikes,” said Amy Arnott, portfolio strategist at Morningstar. Laipply of iShares pointed out the 5- to 6-year range as the sweet spot for long-term investors. “The big message is income and the durability of that income, what it means for the portfolio now relative to where we were a few years ago,” he added. Credit quality should also be a focal point for investors hunting for solid portfolio income and better diversification against stocks. “Depending on your risk tolerance, you probably want to be in mostly investment grade bonds,” said Arnott. “If you’re in lower quality credit, you have a higher risk of default and higher correlation with stocks.” Finally, if you’re at or near retirement, it could pay to add some inflation. Treasury inflation-protected securities are government bonds whose principal fluctuates based on the Consumer Price Index for All Urban Customers . Investors collect interest every six months. Those who are buying individual issues from the government via TreasuryDirect can purchase them in increments of $100 and in 5-, 10- and 30-year maturities. You can also tap that market through a fund like the Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) or the iShares TIPS Bond ETF (TIP) . Just be aware that TIPS act like any other bond in that long-dated issues will see swings in prices as rates rise. Similarly, TIPS ETFs can have differences in duration: Consider that VTIP has a duration of 2.4 years, while TIP has a duration of 6.28 years. “Stick with intermediate-term TIPS,” said Arnott. “For people who are in retirement, especially those who are trying to create a steady cash flow stream, a TIPS ladder with staggered maturity dates could be something to consider.”
About the Author
