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We see the diversification mirage theme in our 2026 Outlook playing out in real time: Rising developed market bond yields underscore our view that traditional diversifiers like long-term Treasuries offer diminished portfolio ballast. The importance of the AI theme illustrates why a “neutral” portfolio allocation doesn’t exist when only a handful of mega forces are driving returns. We think this environment calls for being dynamic and seeking unique return sources.
For a few years, we have laid out how the economic transformation of mega forces challenged traditional methods of portfolio diversification. In this environment, efforts to diversify away from the U.S. or the AI mega force amount to larger active calls than before. Our analysis shows that after accounting for factors that typically explain equity returns, a growing share of U.S. stock returns are tied to a single, common driver (see the chart below).
We think investors should focus less on spreading risk indiscriminately and more on owning it deliberately – in short, a more active approach. We also think portfolios need a clear plan B and readiness to pivot quickly. Another illustration of the diversification mirage? Spiking developed market bond yields in recent weeks. This underscores our view that traditional diversifiers like long-term bonds do not offer the portfolio ballast they once did.
The surge in long-term bond yields is partly due to heightened market concerns about loose fiscal policy and deteriorating fiscal outlooks. Japanese 30-year bond yields hit record-highs earlier this month and are up more than 100 basis points this year. The latest move up was triggered by a Japanese government fiscal spending package, as well as the Bank of Japan signaling a potential rate hike this week. Central banks in Australia and Canada have also shifted their tone on rates – either flagging an end to cuts or the potential for a hike.
We think the U.S. disconnect with other central banks is a risk heading into next year. The U.S. has stronger growth and inflation but is taking a more dovish stance, while these economies face weaker data with more hawkish central banks. We already see the Fed erring on the side of being too easy even with the divisions among Fed policymakers.
Long-term Treasury yields can rise further if investors demand more premium for the risk of holding them, so we prefer short-term Treasuries in this environment. Any rebound in hiring or a rise in business confidence could reignite inflation pressures and bring back policy tensions with debt sustainability. This puts a spotlight on this week’s U.S. data, especially when the release of economic data starts to normalize in January. We think the delayed October payrolls data this week could show a contraction, reflecting deferred government layoffs. These figures could also be noisy due to the difficulties of collecting data during the government shutdown as Fed Chair Jerome Powell noted last week.
We are in a more challenging environment for diversification, favoring a dynamic approach. We think this environment calls for seeking truly idiosyncratic return sources – such as in private markets and hedge funds – as a distinct allocation for earning alpha in portfolios.
We see the diversification mirage theme from our full-year outlook unfolding now. This environment calls for a dynamic approach with a plan B. We stay pro-risk on the AI theme and prefer unique exposures for portfolio ballast.
Jean Boivin is Managing Director, Head of the BlackRock Investment Institute at BlackRock Inc.
Wei Li, Global Chief Investment Strategist, Blackrock Investment Institute at BlackRock Inc., Glenn Purves, Global Head of Macro – BlackRock Investment Institute, and Natalie Gill, Portfolio Strategist – BlackRock Investment Institute, , contributed to this article.
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Content copyright © 2025 BlackRock Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. This article first appeared December 15, 2025, on the BlackRock website. Used with permission.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.
Image: iStock.com/Khanchit Khirisutchalual
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