Bonds just lived through the sharpest quarterly rate spike in over thirty years. For anyone within ten years of retirement, that’s exactly why they deserve a second look.
The short answer: Bonds feel broken right now because inflation is the market’s main worry, and high-quality bonds protect you from recessions, not inflation shocks. With higher yields, bonds now pay you far more to do their real job: funding your retirement paycheck and acting as portfolio ballast. Give every bond dollar a specific job, and the red on your statement starts to look like a sale.
Nobody buys a jersey for the offensive line
Since it’s football season…
Bonds are the offensive linemen of your investment portfolio. They provide the protection that lets you take risks in stocks or real estate, but nobody buys their jersey. Nobody hangs their poster on the wall. You only learn their names when they miss a block.
This quarter, they missed a few.
From July through September 2026, the 10-year Treasury yield rose 87 basis points, its biggest quarterly jump since 1994. On October 1 it briefly hit 5.34%, the highest reading since 2002.
When yields go up, the prices of bonds you already own go down.
So if your “safe” money showed up red on your last statement, you’re not imagining it.
The backdrop today isn’t exactly soothing either. Oil has hovered around $100 a barrel as the U.S.-Iran conflict drags into its seventh month, and in September the Fed raised rates for the first time since 2023. Markets are betting on more.
Unsurprisingly, my phone has rung a few times this month. Here are a few things I’ve heard:
“Why do we own bonds?”
“It’s hard to open my app and see my ‘safe’ investments down.”
“Should my safe investments be in cash?”
I totally get it. Bonds are supposed to be the safe part of your portfolio. They should never be down, right?
Before you cut your offensive line, let’s examine this further.
The problem: bonds look broken because we forgot their job description
For most of the last two decades, stocks and bonds behaved like a seesaw. Stocks fell, bonds rose, and the classic 60/40 portfolio earned its reputation as the sensible grown-up in the room.
That seesaw works better at some times than others, depending on what’s scaring the market. Researchers at AQR, including Cliff Asness, found that the stock-bond correlation tends to turn positive when inflation uncertainty outweighs growth uncertainty. Neither stocks nor bonds like inflation, so inflation news pulls them down together. Growth scares, however, push them apart, because a slowing economy hurts earnings but tends to pull interest rates lower (and bond prices higher).
Ok Nate, so if bonds can fall right alongside stocks, are they still doing their job?
Yes, as long as you know what the job is. Here’s how I think about it: a high-quality bond’s job description has two lines. Pay you steady, predictable income. Hold up when the economy stumbles.
Traditional high-quality bonds are recession insurance. They were never inflation insurance.
If you judge bonds by the wrong standard, you’ll fire them at the worst possible time, right after they’ve repriced to pay you more.
So why should I own bonds?
Reason 1: Bonds are your paycheck when the market is having a bad day
Think of bonds as portfolio ballast. They provide stability and steady support to an investment portfolio, much like a ship’s ballast keeps it upright in rough seas.
Bonds tend to have smaller price swings than stocks while paying predictable interest (coupons), which helps your portfolio keep generating a return even when stock prices are down.
The scariest part of retirement isn’t a market drop. It’s the paycheck stopping. Once you start pulling money out of your portfolio to live on, bonds help keep that retirement paycheck alive.
Reason 2: The yield you start with is the best preview of the return you’ll earn
Vanguard’s research shows that for intermediate and longer-term bonds, the starting yield has been a strong predictor of the annualized return over the following ten years. Short-term T-bills are a different story, since their rates reset every few months.
At the end of 2021, the 10-year Treasury yielded about 1.5%. Today it’s around 5.27%. Same asset. More than three times the income.
That extra yield does double duty as a price shock absorber. A handy rule of thumb: divide a bond’s yield by its duration, and you get roughly how far rates would have to climb in a year before price declines wipe out the interest you collect.
Today's bond income can absorb about 4x more rate pain than in 2021
Rise in the 10-year Treasury yield that would erase one year of interest, in percentage points
What if I don’t like seeing red in my account?
Vanguard’s research shows that for investors with a long enough horizon, higher coupons reinvested at higher rates eventually replenish near-term price losses. Bailing out now means eating the pain and skipping the payoff.
One last point. Higher starting yields raise a fair question: do I need to take as much stock market risk? After the strong stock run-up since 2020, taking a little risk off the table might not be a bad idea, because the bonus you get paid for owning stocks instead of safe bonds has shrunk.
Put simply: stocks are supposed to pay you more than bonds for the bumpy ride (the pros call this the equity risk premium). Right now, that extra pay is thin, because bond yields have become so much more attractive.
Reason 3: The seesaw still works far more often than it fails
Before writing bonds off, look at the track record. Morningstar finds the correlation between U.S. stocks and bonds has averaged about 0.08 since 1960, which means bonds have mostly moved independently of stocks.
Bonds held their ground in 5 of the 6 losing years for stocks since 2000
Calendar-year total return, every year the S&P 500 finished negative, 2000 to 2025
Source: S&P Dow Jones Indices, Bloomberg. Returns rounded. Tap or hover a bar for details; tap the legend to show one series.
2022 is the recent exception, and it’s the one everybody remembers. Recency bias! Vanguard’s review of equity downturns reaches the same conclusion: outside of 2022, bonds acted as shock absorbers in stock sell-offs, even during stretches when the two were positively correlated.
Even in this volatile year, bonds pulled their weight when it counted. During 2026’s stock pullbacks tied to AI sentiment and the Iran war, Morningstar’s index team found that bonds either gained or lost far less than stocks. AQR puts a finer point on it: a positive correlation that’s still well below 1.0 is still diversifying, and swapping bonds for riskier “replacements” usually just adds more stock-like risk. (I get asked about high-yield bonds and preferred stocks all the time.)
The solution: give every bond dollar a specific job
Most portfolios never answer one simple question: what is this bond money for? Once you answer it, the daily price movements simply feel like noise, and nothing else.
Bonds pay the bills so your stocks never have to sell low
Choose a market to see where your retirement paycheck comes from.
At CURRENTS, every bond dollar gets one of two jobs.
| Job | What to own | Best for |
|---|---|---|
| The paycheck (war chest) | A ladder of Treasuries or high-quality corporate or municipal bonds, plus some cash | Covering 3 to 5 years of planned withdrawals |
| The shock absorber | Intermediate-term Treasuries | Cushioning recessions and growth scares |
Here’s how we put that into practice for someone within ten years of retirement.
- Put a number on the paycheck. Figure out what you’ll actually need from the portfolio each year after Social Security, pensions and other income. Multiply by the number of years you want protected. I typically recommend 3 to 5 years of “war chest” savings. That gives stock markets time to recover. Look no further than 2008: stocks bottomed in March 2009 and, by Morningstar’s count, were fully back by 2013. Investors who reinvested their dividends got there even sooner.
- Match maturities to spending. A ladder of Treasuries or high-quality bonds that mature as you need the money means price swings in between matter much less. You’re holding to maturity, so you collect the par value, plus coupon payments all along the way.
- Keep real ballast. Consider holding Treasuries and some cash. For high earners, consider municipal bonds too.
- Add inflation protection on purpose. Regular bonds won’t save you from an inflation scare, so use a tool built for it. Morningstar notes that Treasury Inflation-Protected Securities (TIPS) can be a valuable inflation hedge, especially when they offer positive real yields. Stocks, however, are my favorite choice.
- Put each bond in the right account. Taxable bond interest is often better sheltered inside an IRA, while munis belong in a taxable account when your tax bracket makes the math work. Coordinate this with Roth conversions and future required distributions, because where a bond sits can matter as much as which bond it is.
- Rebalance on rules, not headlines. I personally love bond ladders as a core component of my clients’ portfolios. If your bond portfolio is down, rebalancing may mean trimming stock gains to buy bonds yielding over 5%. It’ll feel uncomfortable. That’s usually a decent sign you’re buying something on sale.
Let’s put a bow on it
Here’s what I want you to walk away with: your bonds didn’t break. They got cheaper, and they’re paying more than they have in over two decades.
Your stocks are the growth engine. Your war chest is the paycheck.
At CURRENTS, we pair that war chest with our Guardrails approach, so your income follows clear rules in strong markets and ugly ones, and nothing gets decided in a panic. None of this requires predicting where rates go next. It just requires knowing what each dollar is supposed to do.
Every great football team has a great offensive line. If you want a second opinion on yours before the next market blitz, give me a holler.
Quick answers
Should I sell my bonds when interest rates are rising? Usually not. Rising rates push current bond prices down, but they also raise the income your bonds pay going forward, as maturing bonds get reinvested at higher rates. With the 10-year Treasury near 5.3%, today’s starting yield is the highest in over two decades, and starting yield has historically been the best predictor of future bond returns.
Do bonds still diversify a stock portfolio? Yes, most of the time. High-quality bonds have held up in most stock bear markets since 2000. They struggle when inflation is the main fear, as in 2022 and parts of 2026, which is why TIPS and cash equivalents belong in the conversation too.
How much should a pre-retiree keep in bonds? Start from projected spending. Add up the withdrawals you’ll need over the next several years and make sure high-quality bonds and cash can cover them without selling stocks in a downturn.
Nate Willardson, CFP® is Managing Partner of Currents Wealth Strategies in Chandler, Arizona. He spent a decade managing portfolios for ultra-high-net-worth families at a global private bank before founding CURRENTS to bring that same institutional discipline to individuals and families navigating retirement, business exits, and concentrated stock sales.
Sources
- Seeking Alpha, Treasuries’ Worst Quarter Since ’94 (LSEG data), October 1, 2026
- Reuters via Investing.com, 10 year US Treasury yield hits highest since 2002, October 1, 2026
- CNBC, 10-year Treasury yield rockets to 19-year high, September 23, 2026
- AQR Capital Management, Asness, Villalon and Ilmanen, A Positive Stock-Bond Correlation Is a Terrible Reason to Add More Equity Risk to Your Portfolio, April 2026
- Vanguard, For bond investors, near-term pain but long-term gain
- Vanguard, What do higher starting yields mean for the bond outlook?
- Vanguard, Understanding the dynamics of stock/bond correlations
- Morningstar, How Portfolio Diversification Works in Inflationary Periods, 2026
- Morningstar Indexes, 4 Ways Portfolio Diversification Has Paid Off in 2026
- Trading Economics, US 10 Year Treasury Note Yield
- U.S. Department of the Treasury, daily par yield curve rates; S&P Dow Jones Indices and Bloomberg index return data (charts)
- Morningstar, What We’ve Learned From 150 Years of Stock Market Crashes
Disclosures
This material is for informational and educational purposes only and does not constitute investment, tax, or legal advice, or a recommendation to buy or sell any security. Past performance is no guarantee of future results. Indices are not available for direct investment and index returns do not reflect fees or expenses. Bond investments carry interest rate, credit, and inflation risk.
Currents Wealth Strategies LLC is a Registered Investment Adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Investment Advisory Services are offered through Currents Wealth Strategies LLC, a registered investment adviser. Securities are offered and sold through Charles Schwab & Co., Inc. and Altruist Financial LLC. Currents Wealth Strategies, Charles Schwab & Co., Inc., and Altruist Financial LLC are not associated entities.
