Investments

03 February 2026

By Damon Frith, NAB Wealth Editor

Over the past ten years, investors have navigated an unusually turbulent landscape: trade wars, a global pandemic, geopolitical shocks, inflation spikes, and the fastest interest‑rate tightening cycle in a generation. Traditionally, bonds have been viewed as the stabilising counterweight to equities, assets that rise when share markets fall, providing diversification and capital preservation. Yet the past decade has challenged this long‑held assumption. In several key episodes, bonds stepped out from their historical pattern, sometimes cushioning portfolios, and at other times falling with or more than equities. Understanding how and why these shifts occurred is essential for modern portfolio construction.

The Traditional Relationship: A foundation in negative correlation

For decades, the core logic of multi‑asset investing rested on the expectation that bonds and equities move in opposite directions. When economic growth slows and equity markets fall, central banks typically cut interest rates, pushing bond yields down and prices up. This negative correlation has typically been the backbone of the classic 60/40 portfolio.

However, the past decade has shown that a more nuanced approach to portfolio construction may be required. Depending on prevailing market conditions, such an approach may include focusing on the duration of bonds, utilising inflation-linked bonds, or taking advantage of available credit strategies. By no means are bonds a poor second cousin within a portfolio, and as we enter 2026, bonds are continuing the high demand experienced in the previous year as a defence against the geopolitical uncertainty washing around the world.

An examination of major events over the past decade stresses the need for active fixed interest portfolio management.

 2015–2016: China slowdown and commodity collapse

The first major volatility episode of this decade came with the Chinese growth scare and commodity price collapse. Equities fell sharply as global growth expectations deteriorated. In this period, bonds behaved as expected: government yields declined, and fixed‑income assets delivered positive returns. This was a textbook demonstration of the diversification investors rely on.

2018: US Federal Reserve tightening and the Q4 equity sell‑off

In late 2018, the US Federal Reserve raised rates aggressively, triggering a sharp equity market correction. Once again, bonds provided protection. As recession fears grew, yields fell, and government bonds rallied. The traditional negative correlation held firm.

2020: The COVID‑19 Shock—A classic flight to safety

The COVID‑19 crash in early 2020 was one of the most violent equities sell‑offs in history. Yet it also produced one of the clearest demonstrations of bonds’ defensive power. As markets panicked, investors poured into government bonds, driving yields to record lows. Bond prices surged, cushioning diversified portfolios. The old rules seemed intact.

But this was the last time in the decade that bonds behaved in such a straightforward way.

2022: Inflation, rate shocks, and the breakdown of diversification

The most consequential shift in bond-equity behaviour occurred in 2022. Inflation surged to multi‑decade highs, prompting central banks to raise interest rates at the fastest pace since the 1980s. This created a rare and painful scenario, as both bonds and equities fell sharply at the same time.

The Bloomberg Global Aggregate Bond Index (unhedged) fell by almost 15% from its high in January 2021, with total losses for 2022 estimated at 12% to 13%. Global equities, as measured by the MSCI World Index, dropped 17.7%. Locally, Australian fixed interest dropped 9.7%, while Australian equities were comparatively resilient, falling just 1.1%.

For domestic investors this was a profound break from the diversification investors expected. Instead of cushioning losses, bonds amplified them. The cause was structural: inflationary shocks push both bond yields and equity discount rates higher, creating simultaneous downward pressure on both asset classes.

2023–2024: Post‑Pandemic tightening and mixed correlations

In the years following the inflation shock, correlations remained unstable. As markets oscillated between recession fears and inflation concerns, bonds sometimes rallied with equities and sometimes fell alongside them. The relationship became regime‑dependent, driven by macroeconomic expectations rather than the predictable patterns of earlier decades.

Why the Past Decade was different

Three forces explain the shifting behaviour of bonds:

1. Inflation Regime Changes

Low, stable inflation supports negative correlations. High or volatile inflation tends to push correlations positive.

2. Central Bank Policy Shifts

Ultra‑low rates from 2014 to 2021 made bonds highly sensitive to rate increases. When rates rose sharply in 2022, duration risk overwhelmed diversification benefits.

3. Valuation Extremes

Entering 2022, bond yields were near historic lows. With little income to cushion price declines, even modest rate increases created capacity for capital losses.

What This Means for Investors

The past decade demonstrates that bonds are not a guaranteed hedge. They remain essential for income, liquidity, and long‑term stability, but their defensive properties depend heavily on the macroeconomic environment.

In low‑inflation, slow‑growth regimes, bonds still diversify equity risk.

In inflationary or tightening regimes, correlations can flip, and bonds may behave more like equities.

For modern portfolios, this means diversification must be broader and more dynamic. Investors may need to consider shorter‑duration bonds, inflation‑linked securities, credit strategies, or alternative diversifiers to manage risk across different regimes.

Conclusion

A well-positioned fixed income portfolio focusing on the macroeconomic and geopolitical outlook, combined with instruments that consider yield and vital components such as inflation and interest rates, can still give consistent returns suitable for most risk appetites.

 

To discover more call 1300 683 106 or email us on investordesk@nab.com.au

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The information contained in this article is believed to be reliable as at February 2026 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article.

©2026 NAB Private Wealth is a division of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.

Investments