The Portfolio Role Of Bonds When Equities Are Overextended

2026-01-01 14:05:00 ET

After a strong run in equities, investors are increasingly asking a simple question: what compensates them for taking additional risk from here? One traditional answer has been the equity risk premium - the excess return investors expect from stocks relative to government bonds. That premium has fallen to levels not seen in more than two decades.¹ When investors are paid little extra to hold equities over Treasuries, markets are implicitly pricing in a high degree of optimism. History suggests that such conditions tend to precede more muted equity returns rather than sustained upside.²...

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