With rates falling in 2026, do bonds finally belong back in my portfolio?
For most of 2022 and 2023, bonds fell alongside equities as rate hikes hit both at once — the 60/40 portfolio's worst year in decades. With central banks now cutting rather than hiking, bonds have room to reassert their usual role as an equity ballast. The right amount and duration depends on your own time horizon and risk tolerance — but many DIY portfolios that dropped bonds after 2022 never rebuilt the allocation.
Why bonds are back in the conversation
For most of 2022 and 2023, bonds broke the rule they're supposed to follow. As central banks raised rates aggressively to fight inflation, bond prices fell in lockstep with equities — the 60/40 portfolio had its worst year in decades, because the "safe" 40% wasn't safe at all. That relationship is now reversing. With the Bank of England and Federal Reserve cutting rates through 2025 and into 2026, and further cuts priced in for the rest of the year, bond prices are rising as yields fall — bond prices and yields move in opposite directions. The ballast function bonds are meant to provide — rising in value when equities fall, because falling growth expectations usually mean falling rates — depends on rates having room to fall. For the first time in several years, they do.
Why many DIY portfolios are still underweight
Retail investors who built portfolios after 2022 learned, correctly at the time, that bonds had just lost them money alongside equities. Many simply stopped allocating to them, going all-equity or holding cash instead. That was a reasonable reaction to a genuinely bad two years for bonds — but a rate-cutting cycle is close to the opposite environment. Investors who never rebuilt a bond allocation are underweight exactly when the asset class's core purpose — cushioning equity drawdowns — is becoming relevant again.
What bonds actually do in a 60/40-style portfolio
The classic 60/40 split isn't really about the ratio — it's about owning two assets that don't fall for the same reasons at the same time, most of the time. Equities fall when growth or earnings expectations drop. Bonds tend to rise in that scenario because falling growth expectations usually lead central banks to cut rates, which pushes bond prices up. That inverse relationship broke down in 2022 specifically because inflation, not growth, was the problem — rates rose to fight inflation even as growth slowed, so both assets fell together. With inflation closer to target and rate cuts now growth-driven rather than inflation-driven, the traditional relationship has more room to reassert itself. No allocation split is fixed — how much you hold in bonds should reflect your own time horizon and volatility tolerance, not a rule from a textbook.
Which bond type suits which risk profile
Gilts (UK government bonds). The lowest-risk option — backed by the UK government, and the natural core holding for a UK investor's fixed income allocation. Longer-dated gilts are more sensitive to rate moves (more upside if rates keep falling, more downside if they don't), while shorter-dated gilts are steadier. Suits investors who want a genuine ballast against equity risk rather than an income play.
Global aggregate bonds. A diversified basket of government and investment-grade corporate bonds across multiple countries, usually currency-hedged back to sterling so currency swings don't swamp the bond return. Spreads interest-rate and credit risk across issuers rather than depending on any single government. Suits investors who want broad fixed-income exposure in one fund rather than picking individual bond markets.
Short-duration bonds. Bonds or funds with a shorter time to maturity, which makes them far less sensitive to interest rate changes in either direction. They give up most of the price gains available if rates fall a lot, in exchange for far less risk if the rate-cutting cycle stalls or reverses. Suits more cautious investors, or money earmarked for a goal in the next few years, where capital stability matters more than maximising the rate-cut upside.
How to add bond exposure cheaply
None of this requires picking individual bonds. UK platforms offer low-cost, diversified bond ETFs and funds that can be bought inside a Stocks and Shares ISA or SIPP the same way as an equity fund, with the same tax-free growth and income.
| Bond type | Example product |
|---|---|
| UK gilts | iShares Core UK Gilts UCITS ETF (IGLT) |
| Short-duration gilts | iShares UK Gilts 0-5yr UCITS ETF (IGLS) |
| Global aggregate (GBP-hedged) | iShares Core Global Aggregate Bond UCITS ETF (AGGG, hedged share class) |
| Global bond fund | Vanguard Global Bond Index Fund (GBP Hedged, Acc) |
Ongoing charges on these funds are typically 0.10–0.25% a year — a fraction of what an actively managed bond fund or an adviser-selected bond portfolio would cost, with far better diversification (dozens to hundreds of individual bonds in one fund) than most investors could achieve buying gilts directly.
The honest caveats
Rate cuts are priced in, not guaranteed. If inflation surprises to the upside, central banks could pause or reverse the cutting cycle, and bond prices would fall again — the same mechanism that makes bonds rise when rates fall works in reverse. Longer-duration bonds carry the most upside if the rate-cut thesis plays out, and the most downside if it doesn't. There's also a difference between rebuilding a sensible strategic bond allocation and trying to trade the rate-cut cycle for a short-term gain — the first is a reasonable portfolio decision; the second is a bet on the timing and pace of central bank decisions, which even professional bond fund managers get wrong regularly.
Key takeaway: Bonds broke their usual relationship with equities during the 2022 rate-hiking shock, and many DIY portfolios never rebuilt the allocation. With central banks now cutting rather than hiking, the ballast function bonds are meant to provide has room to reassert itself — but the right amount and duration depends on your own time horizon and risk tolerance, not a fixed 60/40 rule.
Arken checks your fixed income exposure against your target allocation, flags whether your portfolio has drifted equity-heavy since 2022, and shows the cost difference between the bond funds you hold and lower-cost alternatives.
