Almost all investors are aware of the returns and valuations of their assets, but rarely, with the notable exception of pension funds, do investors consider the valuations of their liabilities.
Large AI-hyperscaler bond issuance, growing geopolitical risks, and mounting government debt burdens are pushing real interest rates higher. At the same time, risk asset markets remain optimistic, and equity prices have continued to advance. The chart below depicts the present value of a $1 million annual payment, growing with inflation, in perpetuity, discounted by the U.S. Treasury TIPS 10-year rate. While we expect portfolios to outperform TIPS, the TIPS rate serves as an ultra-conservative benchmark to vividly illustrate the dampening impact of higher inflation-adjusted interest rates on liabilities. The improvement in financial situations over the last several years has been dramatic. In just the 2026 year-to-date period, the illustrated measure of real liabilities is 8% lower while balanced portfolio assets are about 8% higher 1..
Many investors instinctively underweight fixed income, and the recent outperformance of stocks over bonds has made bonds even less popular. Future obligations have bond-like properties and when bond prices fall (bond yields increase) those obligations are easier to manage. The same rate environment that has pressured bond prices has quietly made future obligations easier to manage.
Balanced Portfolio = 30% S&P 500, 12% Russell 2000, 18% MSCI ACWI xUSA, 32% Bloomberg Agg., & 8% Bloomberg Global Agg.