Fixed income: The structural case for sovereign bonds

Sovereign bonds are entering a more favourable structural regime as stronger nominal growth improves the outlook for government debt while corporate credit increasingly underprices risk.

• The post-global-financial-crisis regime combined globalisation, weak spending, low nominal growth and low inflation, which supported low bond yields and favoured corporate credit over sovereign bonds.
• Post-Covid inflation, supply-chain disruptions and higher interest rates exposed fiscal vulnerabilities and led investors to demand greater compensation for holding government debt.
• Deglobalisation, higher defence and supply-chain spending, AI-driven productivity and full employment could support nominal growth and tax receipts, while inflation remains above central-bank targets and may prompt further, though potentially short, rate hikes.
• Corporate credit starts from expensive levels, faces higher real rates and possible default risk, and is exposed to uncertainty over AI; technology companies are also beginning to increase leverage and bond issuance.
• Sovereign bonds offer higher yields and may benefit from improving relative fiscal dynamics, while signals from gold, Bitcoin, long-term inflation forwards and front-end real yields support the authors' view of resilient nominal growth rather than a debasement trade.

Takeaway: Investors should consider rotating or diversifying toward sovereign bonds and duration, although the thesis depends on stronger nominal growth and remains a relative-value argument rather than a forecast of a severe corporate-credit downturn.