The Yield Cushion is Back

• After recent rises in bond yields, income can now absorb a meaningful increase in interest rates.
• The income on offer in high yield corporate bonds is close to global equities’ total returns over the long run.
• Corporate bond indices concentrate in different companies, sectors and countries than equity indices.

For most of the past decade, the bond allocation in a portfolio did one thing well and one thing badly. It cushioned growth scares well, because when recession fears hit equities, bond yields fell and prices rose. But it was bad at delivering real return as it earned almost nothing from yields that were near zero. When inflation returned in 2022, though, it didn’t do anything well because bonds fell alongside equities, and the more of them you held the more you lost.

That experience has left many investors not knowing how to regard fixed income. This article makes the case, with some arithmetic, that the prospects for bonds look very different from five years ago. Following the recent rises in yields, bonds carry a margin of safety they did not have then. Among higher-yielding bond categories, that margin is large, and the income on offer compares well with equities’ total returns delivered over the long run.

What a Yield Buys You

To understand why bonds are in a better position, a little arithmetic is needed¹. A bond’s total return over the next year is, to a close approximation, its yield less its duration (which measures price sensitivity to yields: a duration of eight means a one percentage point rise in yields triggers a fall of roughly 8% in a bond’s price) multiplied by any rise in yields². That calculation explains why 2022 was so painful.

At the end of 2021, the 7–10 year US Treasury index yielded just 1.45% with a duration of 8.2 years: a rise in yields of just 18 basis points (0.18 percentage points) over the following 12 months would have wiped out a year’s income. In the event, yields rose 237 basis points, and the index lost 15%^3,12.

Run the same arithmetic today and the picture is far brighter. The same Treasury index yields 5.2% with a duration of 6.9 years, so it can now absorb a 78 basis point rise before its 12-month return turns negative — four times the cushion of 2021. The improvement comes from both ends: yields are much higher, and durations have shortened as companies have repaid the low-coupon bonds of the previous decade.

Income Now Covers a Meaningful Rise in Yields

Estimated 12-month total return under a parallel rise in yields, by fixed income segment, as of 30 September 2026. Dots mark the breakeven: the rise in yields at which the 12-month return reaches zero, including the convexity term. Spreads assumed unchanged. Source: ICE Data Indices; VanEck calculations.

All fixed income categories can now absorb a bigger increase in yields, although higher yield bonds have a bigger cushion. Assuming a 100 basis point rise in yields, every government bond segment in the chart above loses money and every corporate bond segment still makes money. Global high yield bonds, with a yield of 7.95% and a duration of 3.3 years, return an estimated +4.7% in that scenario and the total return is still positive at +200 basis points. The breakeven — the rise in yields that would erase a year of income — is 259 basis points, against 122 at the end of 2021.

Two Honest Caveats

The arithmetic above assumes that spreads remain constant, although in reality spreads can widen. The global high yield index’s option-adjusted spread of 312 basis points sits in the bottom sixth of its range over the past decade⁴. Measured against government bonds, the cushion is thin: a widening of around 96 basis points would erase high yield’s extra return over government bonds for the year, leaving an investor no better off. Measured in absolute terms, though, global high yield still looks in a strong position: spreads would need to widen by roughly 260 basis points for the year’s income to be lost entirely. The case made here rests on the bonds’ income, not on spreads tightening further.

The second caveat regards what kind of event might shock the fixed income market. In an economic growth scare, rates and spreads tend to move in opposite directions and partly offset each other. In 2020, high yield spreads widened by over 700 basis points during the worst of the pandemic selloff, yet the US high yield index ended the year up 6% as US Treasury bond yields fell⁵. In an inflation shock they move together, as 2022 showed — though even then the US high yield index lost less than the Treasury index, because its income was higher and its duration shorter⁵. If inflation is now a recurring risk rather than a dormant one, the second kind of shock is the one to plan for, and that is where the cushion matters most.

Yield Offers a Strong Forecast

Over longer horizons, the starting yield does more than cushion your returns: it indicates them. For investment grade corporate bonds, the starting yield at the time an investment is made explains around 70% of the variation in the subsequent five-year annualized return, and realized returns have on average matched the starting yield almost exactly⁶. For high yield bonds the relationship is looser, because it’s disrupted by credit defaults and because the yield at which you sell five years later is rarely the yield at which you bought. Starting yield explains 57% of the variation in the global high yield index’s subsequent five-year returns, and realized returns have fallen short of the starting yield by a median of 1.0 percentage point a year⁶.

Starting Yield and the Return That Followed

Yield to worst at month-end against annualized total return over the following five years, December 1997 to September 2021 (global high yield) and October 1994 to September 2021 (US investment grade). Dashed line shows return equal to starting yield. Source: ICE Data Indices; VanEck calculations.

Two numbers anchor this calculation. From 2014–2025, the global high yield index experienced a par-weighted default rate (a metric that measures the proportion of the index that has defaulted) averaging 1.6% a year, with recoveries of around 35% — a credit loss of roughly 1% a year⁷. The worst year, 2020, cost 2.4%.

From starting yields between 7% and 9% — the band today’s global high yield index yield of 7.95% sits in — the median five-year return that followed was 7.4% a year. Half the outcomes fell between 5.9% and 8.4%; every outcome below 5% came from a period including 2008⁶. Around 7% annual return is what the record suggests. Nobody should call that a forecast — a yield is not a return, and it changes as prices move — but it is a better guide than most.

Past performance is not a reliable indicator of future results. Index returns are shown gross of fees and other costs; it is not possible to invest directly in an index.

Equity-Like Returns, Different Companies

Around 7% is a number worth comparing with returns from equities. The global high yield index has not matched them outright — returning 6.2% a year over the 28 years to the end of 2025 against 7.6% for the MSCI World index — but it came closer than bonds’ reputation suggests. What’s more, the global high yield index’s 9% volatility was considerably less than the MSCI World Index’s 15%⁸.

Over rolling ten-year holding periods, the two have achieved similar returns: a median of 7.1% a year for global high yield, against 7.2% for global equities. Where they differ is at the bottom of the performance range. High yield’s worst decade saw it return 1.4% a year; in the global equity index’s worst decade it lost 2.5% a year. Equities win over five-year windows in terms of performance, but with a worst case loss of 5.7% a year against just 1.6% for global high yield bonds⁸.

Level Over a Decade

Annualized total return over the preceding ten years, monthly, windows ending December 2007 to September 2026. Dashed line is global high yield’s yield to worst at 30 September 2026. Source: ICE Data Indices; Bloomberg; VanEck calculations.

The reason for the discrepancy is that when the equity market has fallen hard, high yield has fallen far less. Measured peak to trough, the MSCI World index fell 50% in 2000–03 against 15% for bonds, 58% in 2007–09 against 36%, 30% in 2011 against 12%, and 17% in the correction of early 2025 against 3%⁹. The exception is 2022, when both fell together and the gap narrowed to 26% for equities against 21% for high yield — caused by the inflation shock described earlier. The two episodes where the gap was widest, 2000–03 and 2025, were both selloffs led by the largest stocks in the index.

Past performance is not a reliable indicator of future results. Index returns are shown gross of fees and other costs; it is not possible to invest directly in an index.

A Fraction of the Fall

Drawdown from previous peak, daily, 31 December 1997 to 30 September 2026. Source: ICE Data Indices; Bloomberg; VanEck calculations.

What few people appreciate is that the global high yield index is far more diversified than the equity index. The ten largest stocks in the MSCI World Index account for 28% of it; the largest single stock accounts for 5.8%, and its three largest sectors come to 58%¹⁰. By contrast, the global high yield index holds 1,520 issuers, with its ten largest making up 8% and no single name above 2%¹⁰. But the sharper point is not the count. Not one of the ten largest companies in MSCI World appears anywhere in the global high yield index — they are all investment grade borrowers. Where the equity index is concentrated in a handful of American technology companies, high yield bond concentration runs to energy, basic industry, telecoms and utilities.

Within global high yield bonds, an investor can choose which version of that risk to take. For instance, the global fallen angel index looks concentrated — its ten largest issuers account for 39% of it — but they span six countries and six industries. This index is also the highest-quality corner of high yield: with 88% of the bonds by value BB-rated, defaulting at around 40% below the rate of the broad index over the past 12 years, and 8% of the index’s par value returning to investment grade each year (against less than 4% for the broad index)¹¹. Emerging market high yield corporates are more diversified: the index holds 326 issuers, with some 18% of market value in the ten largest. Moreover, this index has the lowest correlation to global equities over 10 years of any high yield segment at 0.65¹¹.

Neither is a free lunch. The fallen angels index has a longer duration than the broad high yield index — 4.6 years against 3.3 — so its income covers a 180 basis point rise in yields rather than 259. Emerging market high yield has the weakest ten-year record of the group and fell 27% in 2022 — though it starts from the highest yield of the three, at 8.35%¹¹.

Different Concentration

Weight of the three largest sectors in each index, as of 30 September 2026. Bond index sectors per ICE level-3 classification; MSCI World per GICS, as of 30 September 2026. Source: ICE Data Indices; MSCI; VanEck calculations.

Global high yield is a second source of return, not a hedge against equities: its monthly correlation to the MSCI World Index is 0.74, and it falls when equities fall⁸. What it offers is a return that does not depend on the same ten companies, with a shallower drawdown (price fall from peak to trough) and an income that is paid regardless of whether the equity market rallies. Other bonds can fulfil the role in a portfolio of diversifying away from equities — government bonds can do so in a growth shock, and assets such as local-currency emerging market debt can do so more generally, as their interest rate cycles run independently of developed market central banks.

A Margin of Safety, Restored

None of what’s set out in this article depends on a view of whether interest rates are set to rise or fall. It’s just pointing out that while bonds were priced for perfection five years ago, they’re priced very differently now. Income once again compensates for the possibility of a bad year for interest rates; in high yield bonds it compensates for a very bad one.

For a euro-based investor, hedging the dollar exposure in the global high yield index costs roughly the gap between US and euro short-term rates — currently around 1.4 percentage points, though less at the index level because a fifth of the index is already euro-denominated. Over the past 28 years that cost has averaged 1.0 point a year, leaving a euro-hedged starting yield near 6.8% against 4.1% in euro government bonds. The yield cushion is smaller in euros, but it is still there — and that, after a decade in which it was not, is the point.