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August 2026
Start with what a buyer of bonds is offered today. A 10-year gilt pays close to 5 per cent; a 10-year US Treasury about 4.7 per cent; US inflation-protected bonds lock in roughly 2.3 per cent a year above inflation. On every one of those measures, an investor has not been able to buy high-grade bonds this cheaply since the 2008 financial crisis. Sterling government debt has, in fact, been the strongest-performing sovereign market in the G7 since last autumn, and Vanguard has gone as far as recommending that cautious investors flip the classic formula on its head and hold 60 per cent in bonds and only 40 in shares, on the grounds that the bond-heavy mix now offers better returns for the risk taken.
That history settles the question of whether to own bonds. It says nothing about which bonds to own - and “40 per cent in bonds” is an instruction about size. Maturity, credit quality, inflation protection, currency and structure all still have to be chosen, and the choices matter. In this article, we tried to analyze the main recommendations made by experts in the field.
Financial academics have studied the bond question for decades. Four findings matter for anyone building the 40.
First: what counts as “safe” depends on how long you are investing for. This is the central lesson of Strategic Asset Allocation, the landmark book by Harvard’s John Campbell and Luis Viceira. Cash feels safe because its value never jumps around - but a long-term saver holding cash must reinvest it year after year at whatever rate the market then offers, which is a gamble. For someone investing over decades, the genuinely safe asset is an inflation-linked government bond, because it guarantees a known income, in real terms, for the whole journey. The practical advice: roughly match the maturity of your bonds to how long the money will stay invested, and don’t treat a 4 per cent money-market fund as the cautious choice if your horizon is twenty years - it isn’t.
Second: corporate bonds pay a measurable premium over government bonds. A well-known AQR study by Asvanunt and Richardson, using US data going back to 1926, showed that after fixing an error in earlier research, lenders to companies have been consistently rewarded for the extra risk - over and above what government bonds of similar maturity paid. The practical advice: a bond allocation made up only of government paper leaves money on the table; adding good-quality corporate bonds earns extra income you should expect to keep. The one warning is that this premium shrinks in recessions, just when your shares are also falling - so corporate bonds are a return-booster, not your crisis insurance.
Third: the longest bonds are rarely worth it. Research on the yield curve, summarised in Antti Ilmanen’s Expected Returns, finds that the extra yield you collect for each additional year of maturity fades as maturities extend, while the price swings keep growing. The best deal per unit of risk sits in the middle - roughly 3 to 10 years. The practical advice: favour intermediate maturities and leave 30-year bonds to the pension funds that need them.
Fourth: bonds only protect a share portfolio when inflation is under control. Studies of the stock-bond relationship, echoed by PIMCO and AQR, show that when inflation runs persistently above about 3 per cent, shares and bonds tend to fall together - which is precisely what happened in 2022. Below that threshold, bonds resume their traditional role of rising when shares fall. The practical advice: since nobody can promise inflation stays tame, hold some inflation-linked bonds alongside conventional ones. Spreading the sleeve across government, inflation-linked and corporate bonds is not diversification for its own sake; it is insurance against the one scenario in which the whole 60/40 construction fails at once.
In practice, most experts recommend a “core-satellite” approach. The “core” should make up most of the bond allocation and include simple, high-quality and easy-to-trade investments, mainly government bonds and investment-grade corporate bonds. This is where BlackRock’s strategists sit (“the middle of the curve — yield without the long end’s duration risk”), where Schwab and Fidelity’s 2026 outlooks land, and what Vanguard’s model portfolios express. For investors who need regular income, a ladder of individual bonds held until maturity remains a common retirement strategy. It helps reduce the impact of interest-rate changes by matching bond payments with future spending. “Satellites” mainly consist of corporate bonds that offer higher yields.
For the UK investor building a bond portfolio in pounds, the choice is unusually good. Gilts near 5 per cent form the natural core, with two local refinements. First, the tax wrapper: gilts are exempt from capital gains tax, so low-coupon issues trading below par - where most of the return arrives as untaxed price appreciation - are extraordinarily efficient outside an ISA or SIPP, particularly for additional-rate taxpayers. For money needed within a year or two, FSCS-protected fixed-term deposits compete directly with short gilts - comparison services such as DepositScout track which banks currently pay the most. Second, duration discipline: the long end of the gilt curve remains hostage to fiscal politics and the run-off of pension-fund demand; the short-to-intermediate curve captures the yield with far less risk. Index-linked gilts at positive real yields deserve a structural slice as a “true safe asset” and as the sleeve’s inflation insurance.
Mid-2026 spreads over gilts run roughly 50–80 basis points for AAA/AA names, 80–130 for single-A and 130–200 for BBB - putting all-in gross yields on quality sterling corporates in the 5.5–6 per cent region at the BBB end. The discipline is to hold it diversified, as a bond portfolio of different issuers.
The 60/40 portfolio is relevant again for a simple reason: its bond allocation is finally priced to do both of its jobs - provide income and offer protection.
Both academic research and expert analysis point to a sterling bond allocation built around two main parts: a core of short- to intermediate-term conventional gilts, ideally making up around half of the bond allocation, with a preference for low-coupon issues in taxable accounts; and a diversified selection of sterling investment-grade bonds to capture the credit premium and earn a slightly higher yield.
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