Sandy Liang, CFA, is the head of fixed income at Purpose Investment Partners Inc.
For roughly 40 years, from the early 1980s to 2022, asset allocation was relatively straightforward. A 60:40 equity-bond mix was usually sufficient, and few advisors had to apologize for their fixed-income sleeve. As long as interest rates followed a steady downward glide path, duration quietly did much of the work — price gains on bonds helped offset equity volatility and made fixed income look like reliable ballast. That regime has ended.
In 2022, broad bond markets posted double-digit losses at the same time equities were correcting. Inflation, dormant for years, returned with force. A combination of pandemic-induced supply shocks and aggressive monetary expansion pushed prices sharply higher and forced central banks into one of the fastest tightening cycles in decades. Investors who thought of bonds as “safe” suddenly discovered that interest-rate risk cuts both ways.
In Canada, most large bond funds and ETFs have delivered roughly zero cumulative total return over the past five years. For retirement savers, that means a large portion of their portfolios has spent half a decade going nowhere in nominal terms and losing ground in real terms.
The New Bond Market: Massive Supply, Fewer Natural Buyers
The structural backdrop for government bonds has shifted considerably compared with the pre-pandemic era. In the decade after the Global Financial Crisis, central banks used quantitative easing on such a large scale that negative interest rates became routine vocabulary. The Federal Reserve became a dominant buyer, suppressing yields and supporting prices. Now that inflation is running above target, central banks can no longer expand their balance sheets the same way. Meanwhile, some of the largest foreign holders of U.S. Treasuries — including China — have less appetite for U.S. debt in a post-tariff world with fewer surplus dollars to recycle.
Today, the U.S. is running annual fiscal deficits of roughly US$2 trillion — about double the pre-pandemic norm. Projections from the Congressional Budget Office suggest those deficits will persist and grow under current policy. In practice, this means the Treasury must issue trillions in new bonds every year simply to fund ongoing spending, interest and refinancing. We are firmly in the “this time it’s different” camp — not because deficits are new, but because the scale matters: with a US$30 trillion Treasury market, adding roughly US$2 trillion per year is a material strain on supply-demand dynamics.
Bond markets clear where supply meets demand. Persistent, large-scale government borrowing ultimately requires higher yields to attract marginal buyers — which puts structural upward pressure on long-term rates and reshapes the risk-return profile of traditional fixed income.
Reflexivity, Deficits, and Perception Risk
These dynamics are unfolding against a backdrop of rising concern about fiscal sustainability. George Soros’s concept of reflexivity is useful here — and it’s worth noting that Treasury Secretary Scott Bessent spent much of his career working for Soros. Bessent has been actively signaling to financial markets that keeping borrowing costs reasonable is a top priority for the current Administration.
Markets are not passive observers of fundamentals; they help shape them. If investors come to believe deficits are in fact unsustainable, they will demand higher yields to compensate for fiscal and inflation risk. Higher yields then increase government interest costs, worsening the fiscal position and reinforcing the original concern. Perception becomes part of the underlying reality — which is why fiscal policy now matters more directly to portfolio construction than it did in the past.
What This Means for Fixed-Income Investors
The message is not that bonds are obsolete. Fixed income still provides income, liquidity, and diversification. But the structure of fixed-income allocations needs to evolve — toward strategies that don’t rely on falling interest rates. Active credit strategies in high-yield and investment-grade corporate bonds, special situations, and credit-focused alternatives all deserve a closer look.
From my perspective as a credit investor, the goal is to focus on company-level bottom-up opportunities with attractive risk-reward, rather than making binary macro calls on interest rates or central bank timing. It is very difficult to generate sustainable alpha by outguessing global macro forces. But understanding the macro backdrop as an input to risk assessment is essential.
Today, that backdrop is clear: governments are borrowing heavily, central banks are no longer absorbing issuance as they once did, and bond markets must clear increased supply. Budget deficits and bond issuance are not background noise — they are central forces shaping fixed-income markets. Recognizing how this new regime differs from the last 40 years will be critical to building resilient portfolios in the decade ahead.