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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is co-global head of investment strategy for JPMorgan Private Bank
Investors remain underweight fixed income. After years of zero rates and a brutal repricing in 2022-23, bonds might feel unattractive. Yet that broad-brush view misses one of the most compelling opportunities in markets today. Fixed income is no monolith. Understanding who owes what — and where the opportunities are — is critical.
High government debt and deficits are not new but their scale, combined with political gridlock, inflation risks and the anticipation of US interest rate cuts, creates an environment in which investors must rethink allocations.
Markets are beginning to notice: sovereign debt yield curves are steepening globally, signalling rising concern about fiscal sustainability — a trend likely to continue. And the market’s willingness to reward patience with higher yields is a trend that shouldn’t be ignored.
Over the past decade, households and large corporates have deleveraged. Governments, by contrast, have piled on debt at an unprecedented speed. In the US, the Congressional Budget Office projects federal deficits of roughly $1.9tn in 2025 — 6.2 per cent of GDP — and expects debt to climb towards 118 per cent of GDP by 2035. France’s debt stands above 113 per cent of GDP, heading towards 118 per cent by 2026, whilst UK gilt yields have surged to multi-decade highs on debt concerns. Across the developed world, the challenge of mounting debt now falls squarely to governments.
Yet some investors still paint fixed income with the same brush, with many avoiding the asset class. Indeed, corporate credit is stronger than many investors realise. Owning high-quality corporate bonds today means earning 4-7 per cent in contractual income while gaining exposure to a narrower range of outcomes than equities offer.
The spreads on interest rates for corporate credit over government bonds are historically tight, reflecting strong fundamentals and a favourable macro backdrop. We believe the market will continue to be surprised by the resilience of these spreads. Even if they do widen due to cyclical economic weakness, structural improvements suggest this is likely to be more contained than in past credit cycles.
Within the credit market, the highest-quality opportunities remain investment-grade corporates, reflecting strong balance sheets, disciplined management and robust fundamentals. But the opportunity set extends beyond this core: within the broader corporate universe, selective high yield issues and corporate hybrids — a type of bond issued by companies that combine features of both debt and equity — also present attractive risk-return profiles, offering the potential for enhanced income with historically rare loss rates. For the first time in some markets, corporate bonds are perceived as safer than the sovereigns of the countries in which they are listed.
Taking risk on duration — the sensitivity of a bond’s value due to changes in interest rates over time — remains an important strategy as well. While we prefer taking credit risk for the backdrop we envisage, exposure to medium term government bonds provides balance. In a slowing economy, taking on duration risk can help portfolios capture some higher yields while mitigating the potential downside.
For the last couple of years shorter-term bonds have been outperforming cash rates. We expect this to continue.
Where could this thesis be wrong? The argument assumes a slowdown in the global economy over the next six months, led by the US, without tipping outright into recession. In this scenario, corporate credit should deliver attractive income with reduced volatility compared with equities. But if the slowdown becomes a deep recession, spreads could widen sharply, putting even strong companies under pressure. This is precisely when medium-term government debt would help cushion portfolios — offsetting some credit loss and preserving portfolio resilience.
But the broader lesson is clear: investors can no longer treat fixed income as a single monolithic asset class. The debt landscape has flipped.
The real task for investors is to look beneath the surface — to see where the debt resides, who has borrowed responsibly, and how to position their investments to benefit. High quality corporate credit belongs at the core of these portfolios. Sovereign bonds remain part of the toolkit but may no longer be relied upon as the default “risk-free” foundation.
