Macro fragmentation is reshaping bond benchmarks. Explore how rising deficits, higher term premiums, and growing Treasury weight reshape core fixed income investing.

The shift from globalization to deglobalization—and from cooperation to fragmentation—is reshaping the economy. One implication coming into focus is how this regime shift may alter the composition of core bond benchmarks—and, in turn, the role in portfolios. A factor that may strengthen the case for more active approaches to core fixed income.

A regime more prone to higher term premiums

The push for greater self-sufficiency has led to higher debt issuance and wider deficits. Larger deficits, alongside rising inflation expectations, have pushed term premiums higher. The US Treasury term premium now sits 70 basis points above its long-term median and has been positive for over 440 days—its longest stretch since 2014 (Figure 1).

This shift also suggests that the long period in which broad core bond beta was supported by a secular decline in yields may no longer define the market backdrop. From 2010 through 2020, the Bloomberg US Aggregate Index registered roughly 300 new all-time highs. It has not reached a new all-time high since.¹

Monetary policy also has played a role in the pressure on premiums, with the term premium rising 132 basis points—from -0.63 to +0.69—since March 2023. This period coincides with the Federal Reserve (Fed) shrinking its balance sheet by 22% through quantitative tightening, stepping back from reinvestments and Treasury purchases—removing a key structural buyer.

The Fed has, however, modestly expanded its balance sheet in 2026 to maintain ample reserves. But this has been more concentrated in short-term Treasury bill purchases, which can put upward pressure on the term premium. Moreover, incoming Fed Chair Kevin Warsh has argued for a smaller balance sheet and lesser market intervention²—a factor that may keep the term premium structurally positive and further highlight how this new macro paradigm features less institutional interference (e.g., NATO, WTO).

Rising deficits may matter more for core bond benchmarks

Beyond central bank policy, the trend in the term premium more clearly reflects investors demanding compensation for both inflation and deficit risks. These twin risks carry an upward bias, given the structural macro regime shift underway and the financing needs associated with it.

US total public debt as a percent of GDP recently surpassed 120%. Total public debt is projected to swell throughout the next decade to roughly $56 trillion—up from $30 trillion today—which, as a share of GDP, would exceed the prior all-time high from World War II.³

Rising deficits are already impacting consumer prices (CPI running at 4.2%)⁴ and borrowing costs (US 30-year rates reached a 2007-level high in June).⁵ Rising debt levels and elevated rates have driven total interest outlays to a record $1.3 trillion on a trailing 12-month basis (Figure 2). In fact, they have remained above $1 trillion since the end of 2023, with no signs of mean reversion.

As a larger share of government spending is directed toward servicing debt, less fiscal capacity may be available for more productive uses. That dynamic could weigh on growth over time, making the debt burden harder to stabilize.

If that’s the case, there are three ways to course correct:

1. Practice austerity and issue less debt—unlikely as it’s not politically attractive
2. Entitlement reforms—unlikely as it’s not politically attractive
3. Grow your way out of it—possible if AI delivers

Whatever the policy path, continued issuance appears likely if deficits remain elevated

This matters for bond market investors because as debt rises, so too does issuance, and market cap-weighted benchmarks absorb that supply—leading to a higher weighting in US Treasurys.

The long-term rise in debt issuance has coincided with an increase in the weight of US Treasurys in the Bloomberg US Aggregate Index (Figure 3). The current weight stands at 46%, or nearly half of total exposure, reflecting a 1.2x increase from 2002 (21%). Reinforcing the linkage to deficits, this mirrors the same 1.2x increase in total debt as a percentage of GDP.

The key point is this: given this relationship—also supported by a 95% correlation between the two data points—alongside projections for rising deficits and issuance, the weight of US Treasurys in the Agg could approach 55% over the next decade.⁶ This assumes no other composition shifts (like a faster rise in corporate debt). And to be fair, so far in 2026, corporate debt issuance is up 26% versus 8% of US Treasury debt, driven by the current AI-fueled borrowing surge.⁷ It’s unlikely that rate of growth in corporates persists, but if it does, that presents a different set of problems.

The rise in Treasury debt has had greater durability and longevity. If that continues and pushes up the weight in the Agg, the Agg’s rate sensitivity may be pulled even higher. An effect already on display amid the existing rise in deficits. Holding sector weights at their long-term medians, the index’s duration would be lower than it is today (5.2 years versus 5.6 years).⁸ Notably, the historical inflection point—when weight-adjusted duration fell below actual duration—occurred in the early 2010s, as US Treasurys became the dominant sector. The differential is worse (4.8 years versus 5.6 years) if you adjust the sectors for what they were nearly 25 years ago.⁹

Beyond rate sensitivity, spreads over US Treasurys may become more constrained, as more than half the index would carry a zero spread. This dynamic could increase volatility risks—through higher rate sensitivity—while reducing income potential from core indexed exposure.

Paradigm shift opens the door for active management

Putting these pieces together, national security and economic security have become increasingly intertwined as the world has shifted from globalization toward deglobalization. Greater emphasis on self-sufficiency is also likely to require sustained fiscal support.

In turn, a more fragmented macro regime may contribute to higher issuance, a larger Treasury footprint in market-cap-weighted core benchmarks, and a different balance of duration, spread, and income characteristics within those benchmarks.

If that occurs, broad core bond beta may become a less efficient tool for investors seeking to balance diversification, rate sensitivity, and income generation through a single-indexed exposure. This increases the need to consider active core fixed income allocations today as this paradigm shift starts to unfold.

Those active approaches could include:

• Utilizing fixed income building block (e.g., bond ETFs) exposures more intentionally across sectors, maturity bands, or geographies to target a more tailored yield and duration profile
• Using active core-plus approaches that extend beyond the Agg’s sector mix, potentially alongside complementary satellite exposures
• Constructing a broader active allocation across core diversification (core-plus), income premia (high income strategies), and diversifying alpha (non-traditional and flexible bond strategies)

Big picture? This new macro reality may gradually erode the efficacy, income potential, and sector diversification of broad market cap-weighted core bond benchmarks, increasing the need for more flexible, active approaches to core fixed income. And while this discussion focuses on the US, similar pressures could eventually extend to global bond benchmarks as nations use debt-fueled tactics to compete on a new fragmented global scale.

For more information on fixed income insights and active management, visit our market trends page.