Are 60/40 wallets coming back?
The strong upward pull of the yields offered by bonds makes them attractive as a component in a portfolio made up of equities and fixed income.
The upward movement in yields in 2026 that I commented on in this column a few days ago, could cause fixed income to once again tend to deploy its capacity for diversification and protection against falls in equities, as has happened in the past. That is why portfolios that combine bonds and the stock market have become popular: they can provide a balance that the management giant Vanguard promoted by offering «balanced» funds with fixed income and equities with the aim of obtaining a large part of the return of the stock markets but with volatility low enough to be bearable in the long term.
At the basis of the approach was, and is today because it is still used, the modern theory of portfolios enunciated by the Nobel laureate Harry Markowit. He applied mathematics to stock market analysis and created a mathematical model to find the best possible mix of investments based on the level of risk a person tolerates, demonstrating that financial assets can be combined to reduce total risk without losing return.
For the above approach to work, it is essential that the returns offered by the fixed income part, as well as the shorter-term interest rates, are sufficiently high, so that there is upside potential in the price of bonds and that the contribution of investments in the money market (short-term rates) is also sufficient. Remember that the price of bonds moves in the opposite direction to the yield they offer, that is, if this is reduced, the price of the bond rises.
This has been very difficult to achieve due to the financial repression that we have been experiencing for the last twenty years, with artificially low rates imposed by central banks, reducing official interest rates or buying public debt and private bonds en masse. This meant that the potential upside of the fixed income price was not enough to offset the falls in equities. But this situation is changing this year.
Fixed income prices are suffering
Bond yields have been rising slowly throughout 2026 (their prices therefore falling), driven by strong economic data and pressure from central banks forced to keep inflation at bay.
In fact, the yield on the 10-year German sovereign bond rose last week to 3.5%, its highest level since 2011, while the US 10-year bond stood at almost 5%, its highest since October 2023. This movement was reinforced by favourable business confidence index data, the abundant supply of government bonds in the market and persistent high inflation driven by higher energy costs due in particular to the entrenchment of the Hormuz conflict. Private fixed income prices also weakened throughout the week, both quality sovereign and corporate bonds, as well as high-yield and emerging market bonds. In short, the price of fixed income is at a favourable buying level.
The success of mixed-type portfolios
Historically, combining equities with fixed income in a 60/40 ratio has been a popular investment strategy for decades because their returns have usually, not always, been inversely correlated with each other. When stocks performed poorly, bonds performed well and vice versa (on average). Its offset benefits have allowed investors to build less volatile portfolios, better manage market downturns, and increase average returns over the years while incurring less volatility. This is a way to achieve a return close to that of the global stock market, but with slightly less risk, as demonstrated by its long-term effectiveness:
This has been very difficult to achieve due to the financial repression that we have been experiencing for the last twenty years, with artificially low rates imposed by central banks, reducing official interest rates or buying public debt and private bonds en masse. This meant that the potential upside of the fixed income price was not enough to offset the falls in equities. But this situation is changing this year.
Fixed income prices are suffering
Bond yields have been rising slowly throughout 2026 (their prices therefore falling), driven by strong economic data and pressure from central banks forced to keep inflation at bay.
In fact, the yield on the 10-year German sovereign bond rose last week to 3.5%, its highest level since 2011, while the US 10-year bond stood at almost 5%, its highest since October 2023. This movement was reinforced by favourable business confidence index data, the abundant supply of government bonds in the market and persistent high inflation driven by higher energy costs due in particular to the entrenchment of the Hormuz conflict. Private fixed income prices also weakened throughout the week, both quality sovereign and corporate bonds, as well as high-yield and emerging market bonds. In short, the price of fixed income is at a favourable buying level.
The success of mixed-type portfolios
Historically, combining equities with fixed income in a 60/40 ratio has been a popular investment strategy for decades because their returns have usually, not always, been inversely correlated with each other. When stocks performed poorly, bonds performed well and vice versa (on average). Its offset benefits have allowed investors to build less volatile portfolios, better manage market downturns, and increase average returns over the years while incurring less volatility. This is a way to achieve a return close to that of the global stock market, but with slightly less risk, as demonstrated by its long-term effectiveness: