On September 16, the Federal Reserve raised its policy interest rate target to a range of 3.75%–4%, representing an important step in the Fed’s effort to return inflation to its 2% target and to emphasize its inflation-fighting credibility. The move reflects a resilient economy and a modestly improving labor market, albeit with uneven progress against inflation.
It came after government data revealed that inflation risks, at both the consumer and producer levels, remained heightened in August. These developments have led Vanguard to increase its forecast for the Fed’s policy rate at year-end. We expect one further hike, which would leave the Fed’s year-end target range for the federal funds rate at 4%–4.25%.
A steady advance in yields
The Fed’s first rate hike since July 2023 was unsurprising. After the Fed’s July 2026 policy announcement, futures markets ascribed little more than a 50-50 chance of a September rate hike. But after the release of August inflation data on September 10 and 11, the odds climbed to more than 90%.
Bond yields have advanced steadily in the interim, as bond prices have fallen. Through September 16, the yield on the 10-year U.S. Treasury was up by 34 basis points (at 5.01%) since the Fed held its policy rate steady on July 29, and 83 basis points year to date. The yield on the 30-year U.S. Treasury stood at 5.35% as of September 16.
A favorable starting point for bonds
Reasons for the recent bond market movements beyond the Fed’s attention to inflation include concerns about persistent fiscal deficits and increasing competition for capital amid an AI-led investment cycle.
For much of the decade following the global financial crisis, bond investors faced an environment of exceptionally low yields and limited income potential. Today, that picture looks very different. Higher policy rates have translated into meaningfully higher yields across many fixed income segments, creating a much stronger starting point for future returns. Historically, starting yield has been one of the most reliable indicators of long-term bond performance, making today’s environment substantially more attractive than the one investors faced just a few years ago.
And in the event of a meaningful economic slowdown that would likely lead the Fed and other central banks to spur growth by cutting rates, bonds offer growth potential that was largely absent in 2022.
Simply put, the higher yields have materially improved the opportunity set for fixed income investors while providing a larger potential cushion against equity market volatility.
Notes:
All investing is subject to risk, including the possible loss of the money you invest.
Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.
Publication date: September 2026
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