October 4, 2026

Corporate bonds look better, long-term Treasuries less so

Corporate bond yields have risen faster than Treasury yields, so corporate bonds now pay clearly more. Long-term Treasuries, meanwhile, pay barely more than medium-term ones. So expected returns rose for HYG and LQD and fell for IEF and TLT.

What changed

Symbol	Before	After	Change
iShares iBoxx $ High Yield Corporate Bond ETFHYG	5.13%	5.42%	+0.29pp
iShares iBoxx $ Investment Grade Corporate Bond ETFLQD	5.87%	5.97%	+0.10pp
iShares 7-10 Year Treasury Bond ETFIEF	5.76%	5.53%	−0.23pp
TLT	6.51%	6.24%	−0.27pp

Figures are annual expected returns (arithmetic means), after fees for funds. They are not a forecast or a promise.

Corporate bond yields rose faster than Treasury yields

On October 1, high-yield corporate bonds yielded 8.22% a year, up more than a point from 7.18% a month earlier. Their gap over Treasuries widened from 2.65 to 3.24 points over the same month. Investment-grade corporate bonds, from highly rated companies, yield 5.99%, more than Treasuries of similar maturity.

A bond's future is best told by the interest it pays today

Held to maturity, a bond pays the interest fixed when it was bought. So today's yield is the best starting point for judging a bond's future return. High-yield bonds lose something to the companies that default, but even after allowing for that, today's yield is high.

Long-term Treasuries are not paid for the wait

Treasuries of 20 years and more yield 5.62%, only a little above the 5.17% of 7- to 10-year Treasuries, and 20- and 30-year yields are almost the same. Long-term Treasuries swing far more when interest rates move, and they are paid little extra for it.

The chart below lays a year of simulated outcomes for the long-term fund TLT over the medium-term fund IEF. TLT's expected return (6.24%) is higher than IEF's (5.53%), but its price swings are more than twice as large, so the most typical outcome, the median, is about the same for both, around 5.3%. TLT's range of outcomes is far wider: the same typical result, for a much bumpier ride.

TLT, one year simulated

Last close$77.19

Actual price90% of runs50% of runs50th percentile run

Run drawn

History

Return a year out

The chance of a loss over the year is 34%.

Point at the curve for the odds at any return.

Mean +6.2% ($82.01)Below today 34%Above today 66%

Where the 2,000 simulated years finished, as percent from the price today.

How this is made

Where the centre comes from

The middle of the band is our expected return for this asset over the next year. We start from what investors as a whole can expect to earn and share it out across asset classes, sectors and companies, in proportion to how much risk each carries and how they move together. Where we have specific information — analysts raising or cutting their earnings forecasts, for example — we move a company’s expected return up or down, and say why beneath the chart. The middle line is the typical outcome rather than the average, so the more volatile the asset, the further below its expected return it can sit.

How the paths are drawn

Each path is one possible year, drawn many times over. It starts at today’s price and drifts toward the expected return above, while its day-to-day swings are as large as this asset’s own swings over the past few years — its historical volatility. Repeating that thousands of times gives thousands of different years. The band is the range most of them passed through, and the bell curve is how they were spread out at year end.

TLT, one year simulated

Simulating TLT…

So bond funds' expected returns changed like this

The high-yield fund HYG's expected return rose from 5.13% to 5.42%, and the investment-grade fund LQD's from 5.87% to 5.97%. The medium-term Treasury fund IEF fell from 5.76% to 5.53%, and the long-term Treasury fund TLT from 6.51% to 6.24%. Expected returns on stocks did not change.

What to watch

Part of the rise in high-yield yields is worry that more companies will default. The gap over Treasuries for the lowest-rated companies is above 12 points, the highest in three years. If that worry comes true, the higher interest may not make up for the losses, so these changes are smaller than the yield gaps alone suggest. We will look at corporate bond yields again by the end of November.