The U.S. bond market is in uncharted territory. According to market strategist Charlie Bilello of Creative Planning, it was in a drawdown for 58 consecutive months — by far the longest such stretch in recorded history. Over this period, the bond market endured a peak-to-trough decline of -17.2 per cent, a staggering figure for an asset class traditionally viewed as a safe haven.

For decades, bonds — especially U.S. Treasuries — have served as the cornerstone of diversified portfolios. They’ve offered stability, income, and a reliable counterbalance to equity market volatility. Historically, bond market drawdowns have been relatively short-lived and shallow. But the current environment has flipped that narrative on its head.

What’s Driving the drawdown?

Several forces have converged to create this prolonged period of stress. Chief among them is the United States Federal Reserve’s interest rate policy in response to the risk of persistent inflation. As rates rise, bond prices fall — particularly for longer-duration bonds, which are more sensitive to changes in interest rates. The result has been a steady erosion of bond values, with little relief in sight.

Adding to the pressure are concerns about inflation itself. While headline inflation has moderated from its post-pandemic peaks, underlying price pressures remain sticky. Recent tariff threats and ongoing geopolitical tensions have only added to inflationary fears, further undermining confidence in fixed income as an asset class.

But perhaps the most concerning development is the shifting landscape of bond market demand. According to former Federal Reserve senior trader Joseph Wang, the major buyers of U.S. Treasuries over the past five years have included the Fed itself, foreign governments, hedge funds, and domestic banks. Today, that picture is changing.

With the Federal Reserve reducing its balance sheet and foreign appetite for Treasuries waning, the burden of absorbing new bonds being issued — expected to exceed US$2 trillion annually due to ongoing fiscal deficits — will increasingly fall on hedge funds and banks. This shift raises serious questions about who will step in to support the market, and at what price.

Higher for Longer?

All signs point to a world where interest rates remain elevated for an extended period. This “higher for longer” environment poses a direct challenge to conventional portfolio construction strategies, particularly the traditional 60/40 stock-bond allocation. Investors who once relied on bonds for downside protection have found themselves exposed to simultaneous declines in both equities and fixed income.

The implications are far-reaching. For individual investors, it means rethinking the role of bonds in their portfolios. For institutions — pension funds, insurance companies, endowments — it raises concerns about meeting long-term liabilities and income targets. Bonds, once the bedrock of capital preservation, are now a source of volatility and uncertainty.

Rethinking the Playbook

This historic bond market drawdown is more than just a statistical anomaly; it’s a wake-up call. It underscores the need for a more dynamic approach to portfolio construction, one that accounts for the possibility of prolonged inflation, fiscal imbalances and shifting demand.

Diversification beyond traditional asset classes is becoming increasingly important. Investors are exploring alternatives such as private credit, infrastructure, real assets and structured products to help mitigate risk and generate income. Active management, once out of favor, is regaining relevance as markets become more complex and less forgiving.

The bond market’s longest drawdown in history is a stark reminder that even the most stable-seeming assets are not immune to structural shifts. As the financial landscape evolves, so too must the strategies we use to navigate it. For investors, the message is clear: The old rules may no longer apply, and adaptation is not optional, it’s essential.

Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.