A global bond sell-off has intensified as stronger U.S. economic data, rising energy prices, heavy debt supply, and renewed inflation concerns have pushed yields sharply higher. The yield on 10-year U.S. Treasuries, for example, surged by 22 basis points over two days, from September 23 through September 24, reaching a nearly 20-year high of 5.18%.
But 2026 looks very little like 2022, when the Bloomberg U.S. Aggregate Bond Index (Agg) lost 13% amid historically low yields.
The chart below, which highlights the five largest annual yield increases for the Agg since 1991, illustrates how rising yields can set the stage for stronger returns.
Sharp yield spikes have historically preceded strong returns
Notes: Aggregate yield-to-worst is defined as the lowest potential yield an investor would receive, barring default, if bonds in the portfolio were redeemed early. Higher yield-to-worst levels reflect the increased income potential available to investors as market yields rise.
Source: Vanguard calculations, based on Bloomberg U.S. Aggregate Bond Index as of September 24, 2026. Yield-to-worst data are as of year-end for each year.
A stronger income base in 2026
This year, the Agg’s yield has increased by roughly 120 basis points, and total returns are down about 2.5% through September 24. But investors started the year from a much stronger income base, and that’s where the story turns positive.
The historical parallel we find most compelling is 1999. Treasury yields rose roughly 170 basis points as growth remained robust and the Fed raised its policy interest rate by 75 basis points. Yet the sell-off rebuilt income and pushed yields to levels that proved attractive for long-term investors. The bond market began to rally in 2000, with the Fed still hiking and well before it began cutting in 2001.
A more recent example came in 2018. As the Fed continued tightening, yields rose and bond returns were essentially flat. But the repricing left investors entering 2019 with considerably more income and a better starting point. The Agg subsequently returned 8.7% in 2019. In that sense, 2018 set the table; 2019 was the payoff.
Importantly, the bond market again didn’t wait until the Fed cut rates to rally. From a 2018 peak of 3.24%, and with the Fed still raising rates, markets took the 10-year yield down to 1.9% before the Fed finally cut, on August 1, 2019. The 2-year yield’s decline was similar, from a 2.98% peak in 2018 to 1.73%.
Notably, the market responded not to the Fed’s actions, but rather to changing expectations about what lay ahead.
Bond markets often move before the Fed
“Rate cuts aren’t required for bonds to work,” said Matt Wrzesniewsky, Vanguard head of fixed income client portfolio management. “History reminds us that bond markets often begin adjusting well before the Fed changes direction.”
The benefits of elevated yields are clear. “Higher starting yields do two things,” Wrzesniewsky said. “They provide more income today and they create a larger cushion against future rate volatility.”
The Agg lost 13% in 2022 because investors faced a historic rate shock with very little income to cushion the blow. In 2026, the rate shock has been meaningful but so has the income generated by higher yields. The result has been a very different return experience. That difference may prove critical for returns in 2027.
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Notes:
All investing is subject to risk, including possible loss of principal.
Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.
U.S. government backing of Treasury or agency securities applies only to the underlying securities and does not prevent share-price fluctuations. Unlike stocks and bonds, U.S. Treasury bills are guaranteed as to the timely payment of principal and interest.
Investments in bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.