Markets are largely reducing expectations for a near-term U.S. Federal Reserve (Fed) rate hike, and we agree. July’s weak jobs report, the underwhelming retail sales report, and continued softening of the monthly inflation figures give the Fed room to stay patient in the coming months.
At the same time, our work suggests interest rates may remain higher than investors became accustomed to during the post-Global Financial Crisis era. For fixed-income investors, however, that does not have to be a negative. Higher starting yields can provide higher income potential, and a potentially stronger foundation for total returns than was available through much of the ultra-low-rate period.
Starting with the Fed itself, Chair Kevin Warsh has offered markets less forward guidance than his predecessors. This uncertainty can carry a cost as investors may demand a higher term premium to hold longer-dated bonds when the policy path ahead is less certain.
See more: The Bond Market Is Returning to the Old Normal
Then there is the increasing supply of Treasury bonds hitting the market. The Congressional Budget Office now estimates the federal budget deficit at $2.1 trillion for fiscal 2026, up from $1.9 trillion projected earlier this year. These ongoing deficits must be financed through additional Treasury issuance. Running deficits above 6% of GDP with unemployment still low is historically unusual, and greater supply could remain one factor supporting elevated longer-term yields. Until these structural issues are addressed, we think the recent Treasury Department announcement on increased buybacks of longer-duration bonds could have a limited long-term impact. It is likely that the Treasury will simply issue additional debt of relatively shorter maturity to pay for the increased repurchases of longer-dated bonds.
We are also seeing additional issuance in the corporate bond space as artificial intelligence (AI)-related debt issuance has already reached nearly $500 billion in 2026 according to Goldman Sachs Research, and Morgan Stanley projects a full-year total near $570 billion. That level of issuance is more than double last year’s pace. The AI buildout itself cuts both ways for inflation. The infrastructure must be built with materials, power, and labor before the economy can realize the disinflationary productivity gains AI ultimately promises. We believe we are living through the inflationary part of that story right now.
For investors, this environment reinforces the importance of being selective within fixed income. Elevated yields can create opportunities to generate income without relying solely on falling interest rates for returns, while differences in credit quality, maturity and relative value give active managers more ways to identify opportunities across the bond market.
The bottom line is that today’s interest-rate environment may be more normal than unusual. Rates are broadly consistent with levels seen in the 2000–2007 period and remain below those of the 1990s and 1980s. The anomaly was the ultra-low-rate environment following the Global Financial Crisis and pandemic.
With near-zero rates no longer the baseline, investors may want to consider what today’s higher starting yields can offer: higher income potential, and a broader opportunity set across fixed income. In that sense, today’s environment is not simply something bond investors need to endure—it may give fixed income a more important role in portfolios again.
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Originally posted on ETF Trends
1 Ajmera, Kanishka. “Global AL debt issuance to top $500 billion in 2026, Morgan Stanley says.” Reuters, 10 June 2026, reuters.com.
Shelton Capital Management (Shelton) is a boutique investment firm that helps investors pursue their financial goals through tailored investment solutions and human-centric customer service. Founded in 1985, the company provides mutual funds, ETFs, ETF-based portfolios and separately managed accounts to the clients of wealth managers, retirement plans, and individual investors. As of June 30, 2026, the firm manages more than $7.8 billion in assets across fixed income portfolios, U.S. equity and international equity strategies, ESG solutions, and equity income products leveraging our expertise in options. Over the decades, Shelton has collected awards from established sources such as Morningstar, Lipper, Forbes Advisor, and Pension & Investments. The company continues to add key employee talent and expand their institutional expertise. Shelton is headquartered in Denver, Colorado with additional offices in San Francisco and Memphis. For more information, visit www.shelton.com.
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