Global and active: Fiscal risks strengthen the case for a global allocation to sovereign bonds

Higher starting yields and the renewed sensitivity of bond markets to fiscal deficits strengthen the case for a globally diversified and actively managed sovereign-bond allocation.

• The global bond benchmark, hedged into sterling, returned minus 12 per cent in 2022 but only minus one per cent in the first nine months of this year, as higher starting yields provided more income to offset rising yields.
• The benchmark currently yields close to five per cent, with a duration of around 6.5 years; yields would need to rise by roughly 75 basis points over the next year to produce a negative total return, while an equivalent fall could generate a return of around ten per cent.
• Over the past 20 years, the global benchmark delivered more favourable risk-adjusted performance than each individual developed sovereign-bond market, according to Aviva Investors and Bloomberg data hedged into sterling.
• Aviva Investors’ regression across Germany, Sweden, Switzerland, the UK, Australia, New Zealand, Canada and Japan finds little relationship between fiscal deficits and term premia before 2022, but a markedly stronger relationship thereafter.
• The 2025 deficit data show higher deficits associated with higher term premia, although the US remains a special case because the dollar’s reserve-currency status can support demand for Treasuries.

Takeaway: Investors should combine global diversification with active country, duration and yield-curve selection, reducing exposure to issuers with deteriorating fiscal or inflation fundamentals rather than accepting debt-weighted benchmark exposures.