What higher interest rates may mean for investors

• With yields reaching generationally attractive levels, fixed income can offer investors an opportunity to seek income.
• Higher rates likely reflect more than inflation expectations, with increased private-sector borrowing and stronger-than-expected U.S. growth also contributing to the move.
• Defined maturity strategies such as iShares® iBonds® ETFs can help investors seek today’s yields while maintaining greater visibility into future cash flows.

Bond yields have risen sharply in 2026, both in the U.S. and abroad.¹ September marked the seventh consecutive month of rising U.S. Treasury rates.²

Both 10- and 30-year Treasury yields hit their highest levels since 2002 in early October, reflecting myriad factors as noted below; while rates have retreated from the recent peak, they remain significantly higher since the start of the year.³

• Stronger-than-expected U.S. growth.
• Expectations for additional Fed rate hikes as inflation has remained above the Fed’s 2% target.⁴
• Competition for capital — particularly from U.S. mega-cap hyperscalers, as detailed in our Fall Investment Directions.
• U.S. deficit concerns.

Bond yields historically have moved in the opposite direction of bond prices, so fixed-income markets have likely been challenging in 2026 for those already invested, especially in long-term bonds. Still, we believe the rise in bond yields in 2026 may provide investors an opportunity to seek income.

Inflows into fixed income ETFs set a record of $168.6 billion in Q3 ,up almost 50% year-over-year, as detailed in our Q3 Flow & Tell report.⁵ Ultra-short bond ETFs captured nearly 40% of flows in September, reinforcing investors’ preference for the front end of the curve; however, long-duration Treasury ETFs posted their strongest month of inflows in four years in August.⁶

Against that backdrop, representatives from BlackRock’s global investment teams recently discussed what we believe is a generational opportunity for fixed-income investors. Below is an abridged version of the conversation.

Gargi Chaudhuri, iShares Global Chief Investment Strategist

We believe it’s important to understand three key aspects about fixed-income markets in 2026:

1. Much of the move higher in yields has been driven by real rates, or rates adjusted for inflation, a proxy for economic growth.⁷ Meanwhile, 10-year breakeven rates — the difference between yields on nominal bonds vs. inflation-protected securities of the same maturity⁸ — have remained fairly steady this year.⁹

In other words, Treasury rates have risen largely because U.S. growth has consistently exceeded expectations vs. inflation fears per se.

2. Higher yields are not just a U.S. phenomenon. Rates have moved higher across most developed markets as investors have repriced inflation, growth and European fiscal risks.

3. High correlations between stocks and bonds have been a feature of the post-pandemic era.¹⁰ More recently, the correlations between energy prices and yields — especially in the long end of the Treasury curve — have also been unusually high.¹¹ Correlation isn't causation, but an interesting relationship to watch in Q4, especially if oil prices decline.

Russell Brownback, BlackRock Deputy CIO of Global Fixed Income

This is one of the most attractive starting points in fixed income in decades.

For fixed income investors, starting yield remains one of the most important determinants of forward returns. Today’s higher starting yields can provide both attractive income and a greater cushion against potential rate volatility. (“Cushion” meaning higher starting yields may enable fixed-income investors to withstand a further increase in rates before the losses result in a zero or negative total return. Total return being the combination of yield, or interest income, and the change in price (appreciation or depreciation) of a bond.)

We are not making a call that rates “have” to fall; the starting yields are a key reason to be in the asset class.

Higher rates have already had their traditional impact on the economy, including rising delinquencies and pressure on rate-sensitive areas such as housing. But we think growth will come off the boil a little bit, giving the Fed additional breathing room to avoid further aggressive rate hikes.

If yields stabilize near current levels, the combination of generationally attractive yields and lower implied volatility could create a powerful backdrop for investors to put money back to work in fixed income.

Back in 2020, there were nearly $20 trillion of global bonds with negative yields¹² but the era of “secular stagnation” was abnormal. Going back 40 years of history, the average nominal GDP was 5 to 5.5% — and yields were higher to reflect that. Today, there’s almost no negative yielding assets and over $12 trillion of assets yielding above 6%.¹³ We’ve ascended back to equilibrium.

The appropriate opportunity depends on how much duration and credit risk an investor is willing to take [but] we believe income and diversification should be viewed as separate portfolio objectives. Assets that can provide attractive income may not necessarily provide the diversification investors may need, creating a role for private markets and alternatives alongside traditional fixed income.

We like where yields are today but we need a great deal of humility. The things that keep me awake at night are things I can’t control, like geopolitics, so make sure to keep plenty of liquidity in your portfolio.

Jeff Shen, Co-CIO and Co-Head of Systematic Active Equities in BlackRock’s Systematic investment team

Market-neutral strategies seek to generate alpha — or returns above a benchmark — by going long one (or more) securities and shorting others rather than relying on a directional market view, allowing returns to be driven more by dispersion between securities.

These strategies can generate return streams with limited correlation to equities, fixed income, and commodities, potentially strengthening diversification at the total portfolio level.

Growing concentration risk within traditional markets may further reinforce the value of adding return sources that are not dependent on an investor’s existing equity, fixed income, or commodity exposures.

Opportunities may exist across the liquidity spectrum. Multi-strategy hedge funds can offer attractive returns and low correlations but generally require longer lockups. Daily liquidity strategies can provide greater flexibility and investors may consider the iShares Systematic Alternatives Active ETF (IALT), which offers a way to capture the potential benefits of alternative investing within the convenience of an ETF.

See our Fall Investment Directions for more on diversifying around AI portfolio concentration.

Karen Veraa-Perry, Head of iShares U.S. Fixed Income Strategy

Today’s elevated yields provide investors an opportunity to seek attractive levels of income rather than remaining concentrated in cash or waiting for a better entry point.

For investors looking to capture yields, bonds can be the perfect vehicle but bond picking can be cumbersome. For investors looking to make an incremental change rather than a sweeping portfolio call, putting excess cash to work may be a natural starting point. Short-term bond ETFs may offer yields that are higher than traditional savings accounts and comparable to money market funds, high yield savings accounts, and other cash alternatives.

Municipal bonds may also present an opportunity, particularly as investors have crowded into the front end of the muni curve and yields further out the curve have repriced. Tax-loss harvesting and shifts in investor positioning have contributed to this repricing, creating opportunities for investors willing to move beyond the shortest maturities.

Additionally, we see many financial advisors and investors gravitating to iBonds to build bond ladders and capture yields.

iBonds are an innovative suite of term-maturity ETFs, that hold a diversified portfolio of bonds with similar maturity dates. Each iBond ETF seeks to provide regular interest payments and distribute a final payout in its stated maturity year, similar to traditional bond laddering strategies. However, the funds’ unique structure is designed to help investors easily build bond ladders with only a handful of funds and can be used across a wide range of accounts.

iBonds may be particularly useful for investors seeking to match investments with specific future spending or income needs.