US funds dump long-dated bonds as fixed-income hits 2008 low
US institutional investors are slashing allocations to long-duration government debt, pushing fixed-income portfolio concentration to a 16-year low as sticky inflation destroys the asset class's traditional appeal as a portfolio hedge.
US institutional investors are actively reducing their exposure to long-dated government bonds, redirecting capital toward private credit, infrastructure, and commodities. The strategic pivot comes as fixed-income allocations drop to their lowest level since the 2008 financial crisis.
Assets held in fixed-income funds reached $7.9 trillion as of May 31, according to Morningstar. However, bonds now represent just 20.3% of total portfolios, a sharp decline from 25.7% in 2016 and a drop of 4.8 percentage points from 2025, as capital migrates toward equities and alternative assets.
The Federal Reserve has held its benchmark rate steady at 3.50% to 3.75%. Meanwhile, yields on 10-year Treasuries sit near 4.6% and 30-year yields hover around 5.1%, signaling that market participants expect inflation to remain stubbornly high and are demanding hefty term premiums.
Structural shifts in the global economy are challenging the traditional role of bonds as a safe haven. Grant Johnsey, market solutions head at Northern Trust, warned that persistent inflation, currency weakness, and an oversupply of debt threaten to erode long-term bond returns. "The issue with the bonds is that when you go out past five years, there are too many potential downside headwinds and not enough tailwinds behind it," Johnsey said.
Fund managers are responding by overhauling their fixed-income approach. Blancato noted a shift away from passive government debt into active positions in collateralized loan obligations, mortgage-backed securities, and high-yield credit to capture better returns.
Major pension funds are also restructuring their defenses. The Virginia Retirement System is maintaining its 16% fixed-income target but increasing its exposure to credit, private real estate, and infrastructure. Deputy chief investment officer Chung Ma said the fund is exploring a higher policy leverage range to withstand various inflation scenarios. "We're just not necessarily relying on the negative correlations that we have historically seen," Ma said.
This reallocation reflects a broader consensus that fiscal policy has superseded monetary policy as the primary market driver. Sagard Wealth Management described the current macroeconomic environment as broadly "pro-growth, pro-inflation," driven by deglobalization, supply chain bottlenecks, and escalating defense budgets.
"Many investors are worried that one or more of these variables will play out in the coming years," Johnsey added.
