Fixed income still belongs in a multi-asset portfolio. But, as Tim Carr, Investment Director at Schroder Investment Solutions, sets out below, what we are asking it to do has changed, and how we manage it must change with it.
The question advisers keep coming back to is a fair one: do bonds still belong in a multi-asset portfolio? After the sharp repricing of 2022, the subsequent volatility in gilt and Treasury markets, and now the stagflationary shock of the Iran war, the scepticism is understandable. But the question itself may be slightly wrong. The more useful question is: what exactly are we asking bonds to do?
A regime has changed, not an asset class
For most of the decade and more post global financial crisis, government bonds served a dual purpose in multi-asset portfolios: they generated income and, crucially, they provided a reliable hedge against equity drawdowns. That negative correlation was the bedrock assumption underpinning the industry’s default 60/40 framework. In 2022, that assumption broke down and has not fully recovered.
When central banks raised rates sharply to combat the highest inflation in four decades, equities and bonds fell together – and the protection expected failed when it was needed most. This was not an anomaly but a sign of a structural regime change, the consequences of which are still playing out. With fiscal dynamics playing a larger role, government debt levels rising, and renewed debate about the constraints on central banks, longer-duration bonds may, in particular, face a more persistent structural headwind.
The income case for bonds is stronger today than at any point in the past decade. The case for bonds as a reliable equity hedge is considerably weaker.
The income case is compelling
This does not mean fixed income has lost its place. Yields across the fixed income spectrum, from investment-grade credit to emerging market debt, now offer a genuine return contribution that simply did not exist in the zero-rate world.
At Schroder Investment Solutions, high-quality fixed income continues to play a stabilising and diversifying role across sovereign bonds, investment-grade credit and emerging market debt. At today’s yield levels it delivers meaningful income as a genuine contributor to total return.
The key shift in our thinking is separating the income function from the diversification function. For income, bonds remain very much in the portfolio. For equity hedging, we have had to build a broader and more deliberate toolkit.
Diversification must be earned, not assumed
The answer is to be more deliberate about what fixed income is asked to do. Our analysis consistently shows that the diversifiers which matter most in a high-inflation, high-geopolitical-risk world respond to fundamentally different drivers than either equities or bonds. Commodities, gold and liquid alternatives belong in portfolios not as a concession to volatility but as structural positions that earn their place precisely when traditional asset class correlations converge.
Gold is the clearest example of a structural diversifier that earns its place precisely when bonds cannot. It has been our preferred portfolio hedge for some time, offering protection against debt sustainability concerns and geopolitical risk: two themes that have moved from theoretical to immediate over the past year.
Current conditions sharpen the argument
The market conditions in early 2026 have provided a real-world stress test of these principles. Heightened geopolitical tensions and disruption in global energy markets have created an acute stagflationary pressure: an energy-driven inflation spike meeting slowing global growth. In this environment, bonds and equities have fallen together, with commodity exposure providing a source of portfolio resilience.
Active management is not optional
If there is a single conclusion from three years of market volatility, it is that static or passive fixed income allocation carries hidden costs in this environment. Duration, geographic allocation and credit selection are all active decisions with real consequences, and in a world where central banks are moving in different directions and inflation risks are unevenly distributed, getting them wrong is costly.
We came into 2026 biased towards shorter maturities and selective on credit, on the basis that inflation risks were being underpriced by markets. That positioning reflects a framework built on active risk management rather than passive allocation, and it is precisely that kind of framework this environment demands. For advisers, the practical message is straightforward: clients in cautious risk profiles continue to benefit from bond income, and that income is real and valuable at today’s yield levels. But it needs to be actively managed, with broader diversification doing the work that bonds alone once did.
Multi-asset investing in 2026 is more demanding than it was five years ago. That is precisely the environment in which active, deliberate portfolio construction earns its place.
This feature was part of our 2026 Fixed Income Insights. For deeper analysis on bond markets and rates strategy for advisers, explore IFA Magazine’s latest Fixed Income Insights publication.
About Tim Carr
Tim joined Schroders in 2008 after a successful career as an officer in the Royal Air Force. He is responsible for the coordination and delivery of all aspects of the investment proposition to clients including pension schemes, insurance companies and financial intermediaries. He has led a team of product specialists responsible for flagship institutional multi-asset portfolios since 2015.
