Man Group's latest note says the real problem for bonds is a fast pickup in price growth, not just elevated inflation on its own. Returns deteriorate sharply when inflation above 4% starts accelerating quickly. The team - which included Peter Weidner, who leads total return strategies, systematic - put it bluntly: "The current overarching narrative is that inflation is going to stay 'higher for longer' and that this is bad news for bond holders. We're not so sure," they wrote.
History looks a lot kinder to bondholders when inflation sits in the 2% to 4% zone. In those stretches, 10-year Treasuries averaged 6.9% per year before inflation and about 4% after accounting for it. But flip to a period where inflation above 4% moves up quickly - by more than half a percentage point over a quarter - and the study finds 10-year Treasuries delivered a real annualized drop of 11.7%.
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It has been a bruising run in the Treasury market, with yields pushed up to levels rarely seen in decades. A wave of AI-related investment has stoked expectations for sturdy growth and ongoing inflation pressures, and many investors have been wary of jumping back into bonds. Man Group counters that even with inflation sticking above 2% for years, bonds can still play a role in a long-term portfolio and, in their words, "can still deliver positive real returns."
If you've written off bonds because of the "higher for longer" chorus, Man Group is urging a rethink. "We don't believe you should write off bonds just yet," the authors wrote. "They have historically done well when equities fell, and far from being doomed in a 'higher for longer' world, they can still deliver positive real returns." For regular savers, the takeaway is simple: watch the tempo of inflation, not just the level, because that's what has historically swung bond outcomes.
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