Rising bond yields have unsettled markets, but they may also be creating opportunities for investors willing to look beyond the headlines. Darius McDermott, managing director of FundCalibre, highlights several areas of the market where valuations are becoming increasingly attractive.
On the face of it, rising bond yields have little to recommend them. They lift borrowing costs, curb economic growth and could derail the stock market.
However, financial markets can over-correct. There may be some areas where opportunities are emerging.
Bond yields have been ticking higher since late August. It is difficult to pinpoint what finally alerted bond markets to high government deficits, inflationary threats and wayward fiscal policy – all had been in place for some time – but now they’ve seen them, they can’t unsee them.
The US 10-year bond yield has moved from 4.6% in late August to over 5.3% by the start of October. Other global bonds have followed a similar pattern, and the most indebted nations – France and Japan – have been hit particularly hard.
It is difficult to know whether this has peaked. Attempts to bring yields lower, such as treasury secretary Scott Bessent’s buyback of longer-dated US government bonds, have made little impact.
Inflationary pressures remain high and without any resolution to the war in Iran, these pressures are likely to remain.
That said, for the time being, these pressures appear to be confined to the energy market. There are some signs of contagion in the US, but fewer in the UK and Europe.
The Federal Reserve re-established its inflation-fighting credentials with its September rate rise, but global governments remain on the naughty step.
There is increasing pressure for them to introduce more prudent fiscal policy. Most governments have got the message, but need to square it with their electorates, while also fighting off populists.
That said, bond yields have started to stabilise and it is possible that the rise in bond yields is closer to the end than to the beginning.
With that in mind, investors might start looking at the most notable casualties to see whether there are any opportunities.
As expected, interest rate-sensitive sectors have been hit hard. Property and infrastructure have been among the weakest sectors since bond yields have started rising.
The average fund in the IA Listed Property sector is down 6.5% over the past three months, while the average infrastructure fund is down 3.5%. For context, the average global fund is up 2.5% over the same period*.
Yet this reflexive response may not be supported by fundamentals. For example, investors may be missing the potential for infrastructure assets to defend portfolios during inflationary shocks.
Will Argent, manager of the TM Gravis UK Infrastructure Income fund, says: “Investors traditionally rely on the equity-bond relationship to manage portfolio volatility. However, this standard allocation breaks down during inflationary shocks”.
He says that while broad equities capture upside during growth-driven reflation, infrastructure assets – underpinned by inelastic demand and contractual inflation pass-throughs – protect capital during stagflationary periods when both fixed income and broader equities lag**.
Infrastructure assets are also more diverse than their reputation might suggest. The Gravis fund, for example, holds a range of energy storage and renewable energy infrastructure assets, which have benefited from worries over fossil fuel reliance in the face of a second energy crisis within five years**.
Property was already cheap and has become cheaper still. Here, the inflation link is not as clear. In theory, property owners should be able to drive through inflationary increases, but the pandemic showed that this didn’t necessarily happen at a time of weakening demand. Nevertheless, yields are starting to look attractive.
The TR Property trust, for example, has a yield of 6% and sits on a 10% discount to its net asset value, its lowest since 2020***. Manager Marcus Phayre-Mudge says: “Real estate is always seen as a long-duration, leveraged asset and is therefore sensitive to bond pricing particularly at the longer end of the yield curve.”
However, his view is that in the longer term “best-in-class assets across all sectors are benefitting from constrained supply and renewed demand”.
He is also encouraged by the pick up in merger and acquisition activity around real estate assets. If longer-dated bond yields started to turn back down, property assets may be among the first to benefit.
Then there’s the bond market itself. Many bond and multi-asset managers are finding plenty to like in this new high-yield environment.
Chris Bowie, manager of the TwentyFour Corporate Bond fund, says: “Now that 30-year gilt yields have breached 6% for the first time in nearly 30 years, we are left asking the question: is there enough value in yield curves to finally move overweight duration in our longer-dated strategies? Should we be considering the 30-year bonds we have not owned for many years?”
He points out that gilt yields have barely breached 5% in the decades since Bank of England independence, even during the Truss mini budget crisis****. “A yield of 6%-plus on 30-year gilts is both a big number and historically rare, and thus could present some excellent return potential.”
Yes, there are still plenty of concerns – higher inflation, incontinent spending – but investors are well compensated for the risks.
Within the equity market, high yields have seen some cheap sectors get even cheaper. It has been a tough period for real estate, utilities, and any other ‘bond proxy’ style stock.
The financials sector has also suffered some setbacks, not helped by JP Morgan’s recent earnings miss. This has been a knock-back for quality and value-focused funds. As such, they may be the beneficiaries of any improvement in bond yields.
Higher bond yields are a concern for all market participants, but any stabilisation should prompt investors to take a look at those sectors that have been hit hardest.
In many cases, the risks are more illusory than real and investors are well compensated for taking them.
*Source: FE Analytics total returns in pounds sterling, 10 July 2026 to 12 October 2026
**Source: Gravis Capital, 28 July 2026
***Source: AIC, 12 October 2026
****Source: TwentyFour, 9 October 2026
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.
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