Picture the annual pension statement landing. You skip past the equity funds, because they have done what equities do, and your eye goes to the line marked bonds. Three or four years of nothing, or worse. That was meant to be the safe bit. And on the same morning, the news is telling you bonds now pay 5%.

So should you buy bonds now? Should you hold the ones you have? Or should you quietly wonder why they are in there at all? An awful lot of people I speak to, in pensions, PRSAs, ARFs and ordinary investment accounts, are asking some version of that question. It deserves a straight answer, and the straight answer starts with a correction: that 5% is a dollar number. In euro it is closer to 3.5%, and even that is about the best we have seen since 2009.

Bonds are a mathematical equation, and that works in your favour

Most people judge bonds by what happened recently. That is completely understandable, and with lovely bonds it is also the wrong way round.

Bonds are a mathematical equation in a way that shares are not. With shares, today's valuation tells you something about future returns. With bonds, today's yield tells you almost everything. If you buy a high-quality bond and hold it to maturity, the yield you locked in on day one is, give or take, the return you get. Whatever the price does in between is noise on the way to a number you already know.

Ben Carlson, who joined us on the podcast recently, made this point on 18 September 2026 with a chart going back to 1999. It compares the starting yield on the 10-year US government bond with what investors actually earned over the following ten years. It is not a perfect match, and he says so himself, but he calls the relationship a very strong correlation. The starting yield wins out in the end.

So the better question is what yield your bonds are offering you today. The history matters less than people think. If you want the longer view, including how bonds behaved right through the 1970s, we went through it in whether bonds are still worth holding in your ARF.

What actually happened to your bond fund

Hopefully I can explain this without making a bags of it. When interest rates rise, new bonds come out paying more. Nobody will pay full price for an old bond paying 1% when a new one pays 3%, so the old one gets marked down until the two are roughly equal value. That is exactly what happened from 2022 onwards. The bonds in a typical portfolio did not stop paying interest, did not become junk and did not default overnight. The mathematics changed.

The damage was real, and I do not want to sound flippant about it. A version of the Bloomberg Global Aggregate index hedged to euro lost 14.95% in calendar year 2022, according to the factsheet of a large index fund that tracks it. For the part of the portfolio sold as the steady bit, that is not a pleasant sight.

Duration, and the number most people never hear

Bond funds carry a number called duration. A broad global bond fund sits at roughly six years; the fund above showed 6.0 at the end of June 2026. The rule of thumb is that for every 1% rise in rates, the fund falls by about its duration, so around 6%. If rates fall by 1%, it gains around 6%. There is nothing sinister about that. It is the mechanics.

Here is the part that gets missed. Duration also tells you, roughly, how long it takes for the higher income to earn back the fall in price. Take a fund yielding 2.5% that drops 6% when yields rise to 3.5%. Run the numbers and the fund that took the hit draws level with the one that never moved after a little over six years, then pulls ahead every year after that. Painful in the short term, useful in the long term.

That only works because a bond fund is never one bond. A typical global bond index fund holds thousands, possibly tens of thousands, of government and company bonds. Every month some mature and coupons are paid, and that cash goes into new bonds at today's higher yields. The fund is constantly refreshing itself. Will rates move again from here? Who knows. But whichever way they go, the mechanics run the same way.

Why your 5% is closer to 3.5%

Here is where it gets interesting and slightly murky. The 5% in the headlines is American. The 10-year US Treasury closed between 5.17% and 5.29% in the last week of September 2026, having been below 0.5% earlier this decade. That is a massive change.

We invest in euro, and euro yields are lower. That is simply a fact. The 10-year German government bond, the benchmark for the eurozone, touched just over 3.6% in late September, its highest level since June 2009, and the 10-year Irish government bond was around 3.7%. It is worth remembering where we came from: the German 10-year spent most of the period from May 2019 to January 2022 below zero. You were paying the German government to mind your money. Will you go away out of that.

Why you cannot simply collect the American yield

The obvious question: why not buy the dollar bonds and pocket the 5%? Because most euro investors would hedge the currency, otherwise they are also making a bet on the dollar. Hedging is not free. Its cost is set largely by the gap between short-term interest rates in the two currencies. Say, for argument's sake, US short-term rates sit 2% above euro rates. A 5.2% Treasury hedged back to euro then delivers something closer to 3.2%, which lands you more or less back at euro yields. That is why comparing US and euro yields directly can be misleading, and frankly foolhardy as a basis for a decision.

So if I have explained that clearly, the takeaway is simple: for a euro investor, look at euro yields, and look at your own fund. On the factsheet, check four things:

• Yield to maturity (or yield to worst): the best single guide to what the fund is likely to earn over roughly its duration, before costs.

• Duration: how hard a move in rates will hit the price, and how long the recovery is likely to take.

• The share class: whether it is hedged to euro, or carrying dollar risk you never chose.

• The small print on the yield: if it is calculated in the local currencies of the bonds held, what you receive in euro may differ.

And the good news, whatever your fund shows: the euro number is far better than anything we have had in well over a decade.

Building or spending: the same bond tells two stories

Aoife, still building

Take the entirely fictitious Aoife, 53. High earner, still paying into her pension every month, significant defined contribution assets built up. The camper van is in order, and she has one eye firmly on the next chapter.

For Aoife, higher yields are largely good news. Every euro going into bonds today buys them at lower prices and higher yields than anything on offer for a decade. She should be far less bothered about today's bond prices and far more interested in what her future contributions will earn. If her portfolio rebalances back to its target mix, it is doing the useful thing automatically: topping up bonds when they are cheap. Same logic as shares. When prices fall, the person still buying is buying future returns at a better price.

Seamus, already spending

Now take the equally fictitious Seamus, 65, retired two years and in the spending phase of life, and more power to him. He has an ARF of, for argument's sake, €1m. His employer encouraged a lifestyle or de-risking strategy on his pension, that carried straight into the ARF, and he now holds 40% in bonds. He went into bonds because he thought they were defensive. Right.

Falling bond values feel very different for Seamus, and that is totally understandable. He draws on the pot every month and has watched the part he thought was safe sit in negative territory. The reality is, the temptation then is to sell out of bonds and stop the pain. That is the one move that guarantees the worst outcome: it locks in the price fall and walks away from the higher income that was about to make up for it. Get out of there, and those future returns are gone.

The Irish piece makes his bond allocation matter even more. Revenue's imputed distribution applies in any tax year in which an ARF holder is 60 or over for the whole year, so in practice from the year of the 61st birthday. It treats a minimum of 4% of the fund as drawn each year and taxes it whether or not the money is taken. That rises to 5% once he is 70 or over for the whole tax year, and to 6% if his ARFs and vested PRSAs together are worth more than €2m, on the whole value.

On €1m, that is €40,000 a year. His €400,000 in bonds covers roughly ten years of those minimum withdrawals at today's values. That is what bonds are for in an ARF: a reservoir to draw from when equities are down, so he never has to sell shares at the bottom to meet Revenue's minimum. Is ten years too much? That is a question for another day, but for an awful lot of people the answer is yes, especially where the allocation came from a default nobody chose. Our piece on pension lifestyling and what it costs retirees goes into that.

Two more things belong on Seamus's radar. Bonds are not exempt from negative periods; they are there for time, not for excitement. And inflation: the ECB's September projections put euro area inflation at 3.0% for 2026 and 2.5% for 2027. That is why many portfolios also hold inflation-linked bonds alongside ordinary ones.

Where you hold it matters as much as what you hold

Inside a pension or an ARF, a bond fund grows without tax along the way, like any other asset in there. Tax only arises on what you withdraw.

Outside a pension, the same fund is a different proposition. Irish bond funds and their EU equivalents are taxed under the exit tax regime, at 38% this year and 35% from 1 January 2027 following Budget 2027, and the eight-year deemed disposal rule is still in place. The wider changes are in what Budget 2027 changes for your pension and investments. Same fund, very different outcome. That is a structure question, not a bond question.

Individual Irish government bonds are a different beast entirely. The gain on them is not chargeable to capital gains tax, while the interest is taxed as income. So a bond bought below its face value with a low coupon delivers much of its return as a tax-free gain at maturity, which can make it very interesting for the right person. Whether you are that person depends on your tax position and on the specific bond, and that needs a proper look at your own figures first.

The three things worth keeping

First, the rise in yields that knocked value off your bond fund is the same thing that has improved its future returns, provided you stay in; the duration tells you roughly how long the recovery takes. Second, the 5% in the headlines is a dollar number, and for a euro investor the relevant figure is nearer 3.5%, still the best in well over a decade. Third, whether you are building or spending, judge bonds by what they are offering the future you, and make sure they sit in the right tax wrapper for what you are trying to achieve.

If you are looking at the bond side of your pension or ARF and wondering whether it is doing the job it should, do yourself and your future self a favour and have the conversation, whether with your financial adviser, your scheme administrator or an independent, qualified financial planning firm. Ultimately, it is a case of knowing why each euro is where it is.

I hope this helps.

Paddy