When Kevin Warsh took over as Fed chair in May, most forecasters still expected the year to end with rates meaningfully lower than where it began. Instead, inflation has re-emerged this year, and the conversation has shifted from how many rate cuts to whether the Fed’s next move might be a rate hike. For clients seeing bonds show up in headlines, it is a good moment to look at how the story flipped this year, revisit how bonds are affected by changing rates, and what they are designed to do in a portfolio.
How the Story is Shifting
The Fed cut rates three times in 2025, and the dominant view among economists and forecasters was that the Fed would keep cutting rates up to three more times in 2026.[1] Instead, the Fed hasn’t cut rates once this year. In fact, recent remarks from new Fed Chair Kevin Warsh at the annual Jackson Hole gathering made it clear the central bank still sees “more work to do” on inflation. Markets responded by pricing in a higher chance of a rate increase in the months ahead, signaling a complete reversal from where the conversation started the year.
Inflation has roared back this year, with higher energy prices proving sticky as the war in Iran drags on. At the same time, investors are confronting heavy borrowing needs from governments alongside substantial capital demands from the private sector to build, including the enormous investment underway in AI infrastructure and data centers. In this environment, investors are beginning to demand a larger “term premium”, which effectively means requiring additional compensation for investing in longer maturities when the path of inflation, growth, and government borrowing is particularly uncertain.
The US Treasury reacted to the rising rates recently, launching new efforts to attempt to rein in long-term borrowing rates. In mid-August, it announced plans to at least double the amount of longer-dated bonds that it buys back, which is intended to support liquidity and prices at the long end of the curve.[2] It is worth noting that buybacks are a normal cash-management and liquidity tool the Treasury has used for years, so this isn’t new territory for the market. Rates came down slightly following the announcement, but floated back up over the following few days. This reminds us that the Fed and Treasury can both influence the bond market, but investors ultimately set prices.
Bonds Have a Timeline
With so much attention on what the Fed and Treasury are doing, it’s worth stepping back to remember what a bond actually is and why it behaves the way it does. When you own a stock, you own a small piece of a company, and your investment rises and falls with that company’s fortunes over time. When you own a bond, you are a lender, and the company or government owes you your money back, plus interest, on a set schedule. Stocks have the luxury of time, with prices reflecting a company’s profits far into the future, including opportunities that haven’t materialized yet. Bonds operate on a more finite timeline, focusing on whether a borrower can repay a specific debt by a certain date. That difference in structure helps explain why bonds tend to behave differently than stocks.
Bondholders are paid before shareholders in almost every circumstance, which contributes to bonds’ relative stability. High-quality bonds, particularly U.S. Treasury bonds, often act as ballast: a steadier part of the portfolio that clients can draw on for income or liquidity needs without depending on the timing of the stock market. That stability adds a behavioral benefit beyond any income yield. When investors know that a portion of their portfolio is not subject to the same swings as equities, it often gives them room to stay patient and disciplined when markets get noisy. Over time, this ability to remain invested can have a significant impact on long-term performance.
How Bonds Support a Portfolio
Despite this year’s reversal in rate expectations, the basic mechanics and long-term objectives for most bond investors haven’t changed. When yields rise, the price of existing bonds typically falls, since new bonds are being issued at more attractive rates. That can feel uncomfortable to see on a statement, but it is a normal, mechanical relationship. For bond fund investors, higher yields can create short-term price pressure, but they also allow the portfolio to gradually reinvest at more attractive rates, increasing income potential over time.
For near-term spending needs, shorter-maturity, higher-quality bonds are a core part of our portfolios because they tend to be less sensitive to swings in interest rates. At the same time, longer-maturity bonds can still play an important role in a diversified allocation, particularly when investors are being compensated with meaningfully higher yields for extending maturity. These timelines for client income needs are why maturity matters when we build portfolios.
Staying Grounded in the Plan
This year’s changing bond-market narrative reminds us that markets move for a combination of reasons, many of which are difficult to identify in real time. Attempting to time those moves is rarely a reliable strategy.
At North Berkeley, our team works with clients to build bond allocations sized and structured around their own plan, not around the latest headline. That means thinking through liquidity needs and time horizon first, and letting those decisions drive the portfolio rather than the latest forecast about where interest rates and yields might go next. A well-built plan should not require clairvoyance about the next move in interest rates. Rather, it means being positioned so that whichever way rates move, our clients remain confident in their financial security.
Resources
[1] Federal Funds Rate History 1990 to 2026. Forbes
[2] What’s Behind the U.S. Treasury’s Latest Attempt to Lower Interest Rates. NYTimes
