- Higher starting yields on bonds in the current market environment can help cushion investors against falling bond prices – providing a positive risk-reward trade-off going forward.
- LifeStrategy’s strategic asset allocation mitigates the risk of rising bond yields for long-term investors.
- LifeStrategy’s diversified global bond exposure to benefit from yield curves shifts without the need to time the market by making tactical moves.
Bond markets have undergone a meaningful shift over the last two years. Global yield curves have steepened, with long-term rates outpacing short-term ones.
The chart illustrates how the trend has taken shape across the major developed markets since 2023 - the slope of a yield curve is the difference between the 30-year and 2-year bond yields.
Steeper government yield curves across the world
Notes: Chart shows the spread (slope) between 30-year and 2-year government bond yields for selected economies.
Sources: Bloomberg, Vanguard calculations. As at 2 October 2025.
While rising yields can mean short-term pain (as yield rises, price falls) for multi-asset investors with a strategic allocation to global bonds, the long-term return outlook for bond markets has improved markedly. This is particularly relevant for Vanguard LifeStrategy UCITS ETFs, which maintain strategic allocations to fixed income and equities across five different splits to cater for different investor goals and attitudes to risk.
Higher starting yields can help offset potential capital losses from falling bond prices, as coupon (income) payments on bonds comprise more of a bond total return (price change plus income) —sometimes called a ‘yield cushion’. Today’s higher yields means that investors can lock-in a higher income stream, which can provide a buffer against future bond market volatility as income becomes a greater part of a bond’s total return.
For long-term investors, it’s also important to consider how bond yields tend to move in-step with interest-rate expectations (duration risk1). The price of a bond with longer durations is more sensitive because the value of their future payments falls if newer bonds with higher coupons are issued under a higher interest rate environment.
Falling rates would typically cause long-term bond prices to rise. If perceived fiscal and inflationary pressures begin easing, long-term bond yields would likely start falling.
The good news for LifeStrategy investors
Today’s environment of high long-term bond yields and anticipated rate cuts highlights the value of the Vanguard LifeStrategy range’s disciplined approach to portfolio construction. Our flagship multi-asset portfolios offer a simple, relatively low-cost, all-in-one solution (ETF with ready-made asset allocation) with global diversification and disciplined rebalancing.
LifeStrategy’s global bond exposure spans different durations, sectors, credit qualities and maturities, positioning the portfolios as all-weather solutions without the need to time the market by making tactical moves. Regular rebalancing means buying bonds at lower prices in a rising yield environment, setting up the ETF for stronger bond returns ahead.
The chart below shows the LifeStrategy 60% Equity UCITS ETF, illustrating the diversification provided by its bond allocation – a feature that is consistent across the LifeStrategy UCITS ETF range.
Vanguard LifeStrategy 60% Equity UCITS ETF: bond allocation diversification
Data shown is for the Vanguard LifeStrategy 60% Equity Fund GBP Gross Accumulation share class. Allocation breakdowns may not add up to 100% due to rounding.
Source: Vanguard (Data as at 30/09/2025)
While a steepening curve can signal volatility, it also points to improved long-term return expectations for diversified fixed income portfolios, owing to the benefits of higher starting yields. The long-term interest-rate outlook offers a further potential boost to fixed income returns.
As markets go through cycles, Vanguard LifeStrategy UCITS ETFs offer a simple, effective way to help investors stay on course. With the current yield cushion, combined with global diversification and regular rebalancing, our all-in-one solutions are well positioned to benefit from the next phase of the interest-rate cycle, supporting investors in achieving their long-term financial goals.
1 Duration risk refers to a bond or bond portfolio’s sensitivity to interest rate changes, accounting for characteristics such as yield, coupon rate and maturity. Bond prices move inversely to changes in interest rates, so that if interest rates rise (or fall), bond prices fall (or rise). The longer a bond’s duration, measured in years, the more sensitive its price to interest rate changes.
2 Issuer breakdown: Government includes Sovereigns and Treasuries. Corporates include Financial Institutions, Industrials and Utilities. Government Related includes Provincials, Municipals, Agencies, Local Authorities and Supranationals. Other includes ABS, CMBS and RMBS.
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