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Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly publication.
The author is co-global head of funding technique for JPMorgan Non-public Financial institution
Buyers stay underweight fastened earnings. After years of zero charges and a brutal repricing in 2022-23, bonds may really feel unattractive. But that broad-brush view misses one of the crucial compelling alternatives in markets at this time. Fastened earnings isn’t any monolith. Understanding who owes what — and the place the alternatives are — is important.
Excessive authorities debt and deficits will not be new however their scale, mixed with political gridlock, inflation dangers and the anticipation of US rate of interest cuts, creates an surroundings during which buyers should rethink allocations.
Markets are starting to note: sovereign debt yield curves are steepening globally, signalling rising concern about fiscal sustainability — a development prone to proceed. And the market’s willingness to reward persistence with larger yields is a development that shouldn’t be ignored.
Over the previous decade, households and enormous corporates have deleveraged. Governments, in contrast, have piled on debt at an unprecedented pace. Within the US, the Congressional Price range Workplace initiatives federal deficits of roughly $1.9tn in 2025 — 6.2 per cent of GDP — and expects debt to climb in the direction of 118 per cent of GDP by 2035. France’s debt stands above 113 per cent of GDP, heading in the direction of 118 per cent by 2026, while UK gilt yields have surged to multi-decade highs on debt issues. Throughout the developed world, the problem of mounting debt now falls squarely to governments.
But some buyers nonetheless paint fastened earnings with the identical brush, with many avoiding the asset class. Certainly, company credit score is stronger than many buyers realise. Proudly owning high-quality company bonds at this time means incomes 4-7 per cent in contractual earnings whereas gaining publicity to a narrower vary of outcomes than equities provide.
The spreads on rates of interest for company credit score over authorities bonds are traditionally tight, reflecting robust fundamentals and a beneficial macro backdrop. We consider the market will proceed to be shocked by the resilience of those spreads. Even when they do widen as a result of cyclical financial weak point, structural enhancements recommend that is prone to be extra contained than in previous credit score cycles.
Inside the credit score market, the highest-quality alternatives stay investment-grade corporates, reflecting robust steadiness sheets, disciplined administration and strong fundamentals. However the alternative set extends past this core: throughout the broader company universe, selective excessive yield points and company hybrids — a kind of bond issued by corporations that mix options of each debt and fairness — additionally current enticing risk-return profiles, providing the potential for enhanced earnings with traditionally uncommon loss charges. For the primary time in some markets, company bonds are perceived as safer than the sovereigns of the international locations during which they’re listed.
Taking danger on length — the sensitivity of a bond’s worth as a result of adjustments in rates of interest over time — stays an essential technique as nicely. Whereas we desire taking credit score danger for the backdrop we envisage, publicity to medium time period authorities bonds gives steadiness. In a slowing economic system, taking up length danger may help portfolios seize some larger yields whereas mitigating the potential draw back.
For the final couple of years shorter-term bonds have been outperforming money charges. We anticipate this to proceed.
The place might this thesis be flawed? The argument assumes a slowdown within the international economic system over the following six months, led by the US, with out tipping outright into recession. On this state of affairs, company credit score ought to ship enticing earnings with lowered volatility in contrast with equities. But when the slowdown turns into a deep recession, spreads might widen sharply, placing even robust corporations underneath stress. That is exactly when medium-term authorities debt would assist cushion portfolios — offsetting some credit score loss and preserving portfolio resilience.
However the broader lesson is evident: buyers can not deal with fastened earnings as a single monolithic asset class. The debt panorama has flipped.
The true activity for buyers is to look beneath the floor — to see the place the debt resides, who has borrowed responsibly, and the right way to place their investments to learn. Top quality company credit score belongs on the core of those portfolios. Sovereign bonds stay a part of the toolkit however might not be relied upon because the default “risk-free” basis.
