Should Higher Bond Yields Change Your Stock and Bond Mix?

With interest rates rising and bond yields higher than at any time since the 2008 financial crisis, it might seem like the obvious move is to trim stocks and shift more money into bonds. I understand the appeal. A yield you can see today feels far more certain than a stock return you have to wait years for, and for many wealthy families, certainty carries a lot of weight. In CEG Insights research on families with $25 million or more, 66% said principal protection is their top priority.¹

Why Stock Returns and Bond Yields Are Connected

Stock returns and bond yields are linked. When investors decide what a company is worth, they discount its future profits back to today using a rate that starts with what safe bonds pay, plus an extra reward for taking stock market risk. When bond yields go up, that starting point goes up with them. All else equal, higher yields should push expected stock returns higher too, so the premium for owning stocks over bonds does not automatically shrink when rates rise.

What Nearly a Century of Data Shows

Dimensional Fund Advisors tested this against nearly a century of market history. Looking at 1927 through 2025, they sorted each year by whether the one-month US Treasury bill rate at the start of the year was above or below its historical median, then measured how much the S&P 500 Index earned over those bills.

In the lower-rate years, the equity premium averaged about 9.9%. In the higher-rate years, it averaged 8.1%.² That 1.8 percentage point gap sounds meaningful, but Dimensional’s finding is that the difference is not statistically reliable. In other words, there is not enough evidence to say stocks have rewarded investors more in one rate environment than the other. Past performance does not guarantee future results, and index returns do not reflect fees or expenses.

Higher Yields Still Help the Bond Side

None of this makes bonds less useful. Higher yields mean the bond side of a portfolio gets paid better to do its main job, which in our approach is reducing overall portfolio volatility and funding near-term spending.

The Tax Cost of Switching

For families with significant wealth, making this trade on yield alone can get expensive. Trimming stocks often means selling appreciated positions in taxable accounts, which can create a capital gains bill today. The proceeds then go into bonds whose interest, unless it is municipal, is generally taxed at ordinary income rates. The payoff from switching to bonds is uncertain. For appreciated positions in a taxable account, the tax bill is not.

A large share of this money may also have a time horizon longer than the investor’s own lifetime. Dollars meant for children, grandchildren, or a family foundation are often the dollars that most need the long-term growth potential stocks have historically offered.

Three Questions That Should Drive Your Mix

In my view, the right mix of stocks and bonds comes down to three questions. How much risk can you afford to take? How much risk are you comfortable taking? And how much risk do you need to take to reach your goals? What bonds happen to yield this year is not one of them.

If your answers to those questions have not changed, your allocation may not need to either. If they have, the tax cost of getting to a new mix belongs in the decision from the start.

The Bottom Line

Before trading stocks for bonds, weigh the move against your goals and your tax bill. In my view, the evidence suggests today’s yields alone are not a good enough reason to make the switch.

Sources

Bond yields higher than at any time since the global financial crisis; equity premium of about 9.9% in below-median-rate years and 8.1% in above-median-rate years, 1927–2025; difference not statistically reliable: Wes Crill, PhD, “Are Higher Rates Cause to Add More Fixed Income?” Above the Fray, Dimensional Fund Advisors email newsletter, Sept. 10, 2026. Distributed by email; no public web version found. Subscription page: https://www.dimensional.com/us-en/subscribe-atf

Underlying data cited by Dimensional: S&P 500 Index data, S&P Dow Jones Indices LLC; one-month Treasury bill returns, Kenneth R. French Data Library. https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

10-year Treasury yield data cited by Dimensional: Federal Reserve Bank of St. Louis (FRED). https://fred.stlouisfed.org/series/dgs10

1.8 percentage point gap: Calculated from the Dimensional figures above (9.9% minus 8.1%).

66% of families with $25 million or more prioritize principal protection: CEG Insights data, as reported in Michael Kitces and John Bowen, “The 3 Concerns Keeping $25M+ Families Up at Night,” Kitces.com, Aug. 2025. https://www.kitces.com/blog/ultra-high-net-worth-family-concerns-25m-advisor-services-upmarket/

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