Some U.S. investors who once relied on bonds to cushion equity selloffs are making more room for commodities, infrastructure, private credit, and other inflation-sensitive assets — a structural shift driven by persistent inflation, heavy government borrowing, policy uncertainty, and repeated episodes of stocks and bonds falling in tandem, which have weakened bonds' traditional role as a portfolio ballast.
The Core Problem: Bonds Aren't Behaving Like Insurance Anymore
"Bonds only work as insurance in your portfolio when inflation is low," said Phil Blancato, chief market strategist at wealth management firm Osaic. While U.S. consumer inflation has eased to around 3.5%, escalating U.S.-Iran tensions threaten another oil-driven rebound in price pressures — and the 10-year Treasury yield has already climbed to its highest level since January 2025 as surging oil rekindles inflation fears.
Why the Traditional 60/40 Model Is Under Strain
Investors point to a specific mechanism: the stock-bond correlation tends to turn positive when inflation runs high, typically around 2.7%, except during recessions when Treasuries still tend to provide a hedge. A positive correlation means stocks and bonds move in the same direction — which strips away the diversification benefit investors have historically counted on bonds to provide during equity selloffs, undermining the logic of the classic 60% stocks/40% bonds portfolio.
How Firms Are Actually Repositioning
Osaic has cut fixed income in its 60/40 portfolio in recent weeks, to 31% from 40%, and added a 6% commodities allocation — its first in 15 years — after concluding bonds have failed to provide sufficient downside protection during equity selloffs. Blancato said the firm is also shifting from passive fixed income into more active positions in collateralized loan obligations, mortgage-backed securities, and high-yield debt, seeking better opportunities beyond plain Treasuries.
The Virginia Retirement System is keeping its 16% fixed-income allocation intact but boosting credit, private real estate, and infrastructure, while exploring a higher policy leverage range to build resilience across different inflation scenarios. Deputy chief investment officer Chung Ma explained the shift plainly: "We're just not necessarily relying on the negative correlations that we have historically seen." Sagard Wealth has spent the past year moving clients away from most developed-market fixed income and into a "preservation bucket" mix of commodities, gold, real estate, and infrastructure, with one strategist summing up the view bluntly: "fixed income is the inflation loser."
The Data Behind the Shift
Despite assets in fixed-income funds climbing to $7.9 trillion as of May 31, their share of overall portfolios fell to 20.3% from 25.7% in 2016 — and down 4.8 percentage points from 2025 alone — marking the lowest month-end concentration since May 2008, according to Morningstar data. Grant Johnsey, market solutions head at Northern Trust, noted that over the long run, bond returns can be eroded by persistent inflation, a weakening currency, and supply outpacing demand.
Where the Money Is Actually Flowing
Real assets — tangible assets valued for their intrinsic physical qualities — have been gaining appeal since the post-Covid inflation shock, with the case strengthening further as the bond outlook clouds and soaring equity markets appear increasingly vulnerable, according to Jenn Bender, global chief investment strategist at State Street Investment Management. State Street has seen its strongest flows this year into commodities, with infrastructure and natural resources also drawing significant investor interest — its flagship real asset strategy pulled in roughly 6% net inflows in 2025, with that momentum continuing into 2026.
Broader Institutional Sentiment
The shift reflects a broader mood shift among institutional investors more generally. A recent Natixis Investment Managers survey found four in ten institutional investors now see re-inflation as a key risk, up from 30% in 2025, as the Fed continues navigating persistent price pressures amid ongoing tariff uncertainty. That same survey found 51% of institutional investors foresee higher corporate defaults ahead, even as many are selectively adding exposure to investment-grade, high-yield, and emerging-market debt — with 70% saying active management has become essential to fixed-income investing in the current environment, rather than simply holding passive bond index exposure.
Where the Fed Fits In
The Federal Reserve has held rates steady in the 3.50%-3.75% range, with yields hovering around the 4% mark — a policy backdrop that, combined with the renewed inflation risk from the Iran conflict's impact on oil prices, has kept bond investors on edge about whether the traditional inverse relationship between stocks and bonds will reliably reassert itself if equity markets stumble.
What's Next
With inflation risk tied directly to an unresolved and escalating Middle East conflict, and major institutional investors from wealth managers to public pension funds already reallocating away from traditional fixed income, the trend toward commodities, private credit, infrastructure, and other inflation-sensitive assets appears likely to continue in the near term. Whether this represents a lasting structural shift in how portfolios are built, or a temporary reaction to an unusually inflationary geopolitical moment, will likely become clearer as the Iran conflict — and its impact on oil prices and broader inflation — continues to evolve.