That relationship still holds in many scenarios – but recent market moves have been a sharp reminder that it is conditional, not guaranteed. 

In March, global bond markets suffered one of their steepest sell‑offs in years. Yields rose sharply across the US, UK and Europe, even as equity markets came under pressure.  

The trigger was not slowing growth or financial stress, but an inflation shock, as conflict between the US and Iran pushed oil prices above US$100 a barrel. The result felt uncomfortably familiar to 2022 as both stocks and bonds lost value at the same time. 

For investors who depend on bonds for diversification and capital stability, the episode raises an uncomfortable but necessary question: what happens when bonds stop behaving? 

Why bonds fell when investors expected protection 

Government bonds are often described as ‘risk‑free’. In one sense, that is true: the risk of default for developed‑market governments is extremely low. But most investors do not lose money in bond markets because of default – they lose money because of duration. 

Duration measures how sensitive a bond’s price is to changes in interest rates. The longer the maturity, the greater the sensitivity. As a rough guide, a bond with a duration of ten years will fall by around 10% if yields rise by one percentage point, all else being equal. 

That was the problem in March. Rising oil prices reignited fears that inflation would remain stickier than expected. Markets were forced to rethink the path of central‑bank policy, pushing yields higher across the curve, particularly at longer maturities (see Chart 1). 

At the same time, something else changed: term premia. This is the extra compensation investors demand for holding long‑dated bonds when inflation uncertainty and volatility rise. When term premia increase, long‑term yields can rise even if growth concerns are mounting – leaving long‑duration bonds exposed from multiple angles. 

The result was a rare and uncomfortable combination: a period when owning bonds and equities simultaneously proved painful. 

Rethinking risk: less duration, more resilience 

Episodes like this are prompting investors to reassess how they allocate risk within their portfolios. Rather than stretching for duration or relying on bonds as automatic shock absorbers, many are refocusing on capital preservation and outcome control. 

In bond allocations, that often means reducing sensitivity to rate movements and prioritising cashflow certainty. Short‑dated bond strategies – typically investing in maturities of one to three years – are designed to do exactly that. 

Compared with longer‑dated bonds, short‑maturity strategies rely far less on being ‘right’ about the future path of interest rates. They sit closer to maturity, experience less price volatility and often allow investors to hold bonds to redemption if markets become choppy. 

Why short‑dated bonds behave differently 

To understand their appeal, it helps to return to first principles. 

Duration is the core risk in most bonds. The longer the duration, the more a bond’s price will swing when yields change. That is why, during sharp interest-rate moves, volatility tends to be concentrated at the long end of the yield curve. 

Short‑dated bonds simply carry less duration risk. When yields rise, prices still fall, but usually by far less. In practice, that can make a meaningful difference to drawdowns during inflation‑driven sell‑offs. 

Just as importantly, income is now doing more of the work. 

When yields are higher, a greater share of total return comes from contractual income – known as carry – rather than from price appreciation. For short‑dated bonds, that income stream arrives sooner and provides a cushion against adverse yield moves (see Chart 2). 

In today’s upward‑sloping yield curves, this dynamic has become particularly attractive. Short‑dated strategies can now generate returns competitive with – and in some cases superior to – cash, without taking on the same level of interest‑rate risk as longer‑dated bonds. 

Income versus duration: what do investors really own? 

Investors often think they ‘own bonds’. In reality, they are choosing a mix of two exposures: income, from contractual cashflows over a defined horizon; and duration, a bet that yields will fall (or at least not rise) and that term premia will remain stable. 

In calm markets, those exposures can work together. In inflation shocks, they can diverge sharply. 

March demonstrated how painful duration exposure can be when oil‑led inflation concerns push both rate expectations and term premia higher at the same time.  

Meanwhile, short‑dated income approaches tilt the balance decisively toward being paid while you wait, rather than relying on favourable macro outcomes. 

A more resilient role for bonds 

Short‑dated income portfolios are not risk‑free, and they are not immune to volatility. Credit risk, liquidity conditions and unexpected rate moves still matter.  

But in an environment where inflation shocks travel faster than central banks can respond, their risk profile looks increasingly relevant. 

The case for short maturities is no longer about maximising returns. It is about controlling the path of outcomes – dampening drawdowns, improving predictability and rebuilding resilience within portfolios.