Photo Alexis Bienvenu © LFDE
By Alexis Bienvenu, Portfolio Manager, La Financière de l’Échiquier (LFDE)
The year 2026 marks a historic turning point for markets. Government bond yields have returned to levels investors had not seen for twenty years in the major developed economies, and for thirty years in Japan. As of 1 October, 10-year yields stood at around 5.3% in the United States, 3.6% in Germany, 5.0% in France and 3.1% in Japan, some 300 to 500 basis points above their 2020 lows.
The shift began in 2022, when the inflation shock led central banks to raise policy rates aggressively. Long-term yields followed, peaking in autumn 2023 before easing back. This year, however, those highs have been comfortably surpassed.
Elevated yields do not necessarily make bonds attractive, though. For that, they must be free from threats on two fronts: inflation and public finances.
On inflation, the picture is relatively reassuring. Admittedly, inflation remains close to, or slightly above, 3% in the major developed economies. But there is no sign of a lasting acceleration, and forecasts point instead to stabilisation, or even a gradual easing. Most importantly, real yields, adjusted for inflation, have turned significantly positive again. US inflation-linked Treasuries now offer a 10-year real yield of close to 2.7%, a level not seen since the 2008 financial crisis. This extra return makes it possible to invest without undue fear of inflation, barring a catastrophic scenario, of course.
The deterioration in public finances is a more worrying issue. The fiscal trajectories of many developed countries are unsustainable in the long run. But with the possible exception of France, currently at the centre of a bond-market storm, few major states face any short-term challenge to their creditworthiness. Public finances are undeniably weaker, but on the whole they are not out of control.
The rise in the term premium reflects precisely this uncomfortable, though not dramatic, situation. According to estimates from the Federal Reserve Bank of San Francisco, the term premium on the 10-year US Treasury – the additional compensation investors demand for lending long rather than short – now stands at around 1.4%, a level consistent with much of financial history, compared with readings close to zero for much of the previous decade. Research from the Bank for International Settlements also confirms that the return of high yields largely reflects this normalisation rather than a sharp deterioration in macroeconomic fundamentals[1].
Bonds have therefore not become risk-free. But for the first time in a long while, that risk is properly rewarded. The flip side of these rediscovered yields, however, is less favourable for equities. The forward earnings yield on the S&P 500 is around 5% (Bloomberg consensus), close to the US 10-year yield. The return gap between equities and bonds, which strongly favoured equities in the zero-rate era, has virtually disappeared. That does not condemn equities to underperform. But whereas equity earnings yields are by nature uncertain and volatile, the return on long-dated bonds held to maturity is almost certain. From that perspective, equities have lost some of their appeal.
After fifteen years in the wilderness, sovereign bonds are once again a genuine alternative to equities. Global savings could be profoundly reshaped as a result: flows that had been directed towards equities by default could now be partly redirected to bonds. That could slow the advance of equities, whatever the promises held out by artificial intelligence. The lenders’ hour has come.
Disclaimer: These data and opinions are provided for information purposes only and do not constitute an offer to buy or sell a security, investment advice or financial analysis. The opinions expressed are those of the author and do not engage LFDE’s liability. Past performance is no guarantee of future results.
[1] Yields climb, yet risk appetite holds firm, September 2026
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