Real yields: the reset that makes bonds competitive with equities again

Rising US Treasury yields usually put advisers and their clients on alert for an inflation problem and a bad year for bonds. The move underway in 2026 is a different animal, and it changes the asset allocation call rather than simply hurting it.

US 10-year yields have climbed roughly 50 basis points since the start of the year. According to Paul Mielczarski, head of macro strategy at Brandywine Global, none of that is an inflation scare.

Despite the spike in energy prices after the outbreak of war with Iran, market-based measures of medium-term inflation expectations have drifted lower. The entire repricing has come through real yields, with the 10-year real rate now approaching 2.5 per cent.

That distinction is the whole story. A rise in nominal yields driven by inflation fear is a warning. A rise driven by real yields, in an economy that keeps surprising to the upside, is something advisers can put to work.

Not an inflation scare

Mielczarski, whose firm is part of Franklin Templeton, ties the move to an economy that has absorbed shock after shock and kept growing.

“US real yields have been rising because despite multiple shocks, the US economy continues to surprise to the upside,” he says.

The support has come from the artificial intelligence capital expenditure cycle and resilient consumers. What is new in the first half of 2026, on his read, is that corporate investment is broadening beyond AI, and employment growth, until recently a soft spot, is showing tentative signs of improvement. Put together, he argues, the expansion is becoming more self-sustaining rather than running on one engine.

“Stronger than expected growth, resilient consumers and broader corporate investment suggest the economy remains on firm footing, while markets are repricing a higher neutral rate,” Mielczarski says. “For investors, elevated real yields may make bonds increasingly attractive relative to equities.”

The neutral rate reset

Underneath the yield move sits a bigger argument about the neutral real policy rate, the level at which monetary policy is neither pressing on the economy nor supporting it.

The history is stark. Before the global financial crisis, the neutral real rate was generally put at 2 per cent to 2.5 per cent. Through the 2010s, amid fears of secular stagnation, estimates collapsed toward zero. Today the Federal Reserve and most sell-side economists land at roughly 0.75 per cent to 1 per cent.

Mielczarski thinks that official estimate is too low. Market-implied estimates of the natural rate have been rising toward 1.8 per cent to 2 per cent, and the real-world evidence sides with the market.

If policy were as restrictive as the Fed’s numbers imply, it would show, but financial conditions are easy, growth is decent and credit growth is picking up. The simplest explanation, he argues, is that the neutral rate is higher than officials think and the bond market is pricing it in.

The confidence bands around these estimates are, he concedes, significant. But the direction of travel is the part advisers can use.

The relative value case

This is where the argument turns practical. If real yields are elevated because the economy is healthy rather than because inflation is loose, then a 2.5 per cent real return on a risk-free asset is compensation worth having.

“The spread between the US 10-year real yield and the S&P 500 dividend yield is now at its widest since the early 2000s.”

“Bonds have not offered this kind of relative value versus equities in over two decades,” Mielczarski says.

For an adviser, that reframes the fixed income conversation. Duration stopped being dead money somewhere in the repricing, and a high-quality bond now earns a real return competitive with other major asset classes at considerably lower volatility.

The case is not that equities are about to roll over. It is that the reward for holding bonds instead of stretching for it elsewhere has quietly become real.

The catch

The honest part of the pitch is that Mielczarski is building on a contested call. His whole thesis rests on the neutral rate being higher than the Fed believes, and he admits the error bars around r-star are enormous. If growth rolls over and the doves turn out to be right, the logic that justifies elevated real yields weakens with it.

There is a nearer-term risk too. Buying duration today could lead to challenges down the track if real yields keep climbing before they settle. And the reset that created this opportunity was, in his own words, painful for the holders who lived through it.

“The rise in real yields reflects a healthier economy and a recognition that the ultra-low neutral rates of the 2010s were an aberration, not a permanent state,” he says.

The reset has already happened. The question investors now face is whether their fixed income weightings still reflect the world before it.