Despite short-term volatility, bond and equity markets are still likely to generate positive returns over the next 12 months, backed by long-running themes.
The sharp rise in long-term government bond yields is an important development confronting investors in 2026.
The yield on the 10-year US Treasury has reached 5 per cent, its highest level since 2007. Similar moves have been seen across the UK, Germany and Japan. Australia has followed suit, with the yield on the Australian 10-
year rising above 5.3 per cent for the first time since 2011.
Stock and bond markets are lacking positive momentum, although, to be fair, equity markets aren’t far off record highs. Several factors have combined to create a wall of worry feeding into higher yields.
Oil prices have moved up, with both Brent and West Texas Intermediate trading above $US100 ($144) a barrel. Disrupted energy flows through the Middle East risk keeping inflation and interest rates higher for longer.
But geopolitics can change quickly. A ceasefire, restored energy flows or increased production elsewhere could ease pressure on oil markets faster than currently expected.
The United States Federal Reserve recently raised rates by 0.25 of a percentage point, and 16 of the 18 rate committee participants think another rate rise will occur before the year-end. The European Central Bank has also increased rates.
Inflation is too high, not just in the US but also in most developed markets. We expect rate rises from the Bank of Japan and at some point, the Bank of England. Likewise, there is a reasonable chance that the Reserve Bank of Australia will be forced to raise rates again.