Why Government bonds may be your safe harbour while smart credit picks may help drive returns – Three global themes investors should not ignore.
Government bonds are regaining their role
Government bonds are beginning to regain their appeal as slower growth and still-restrictive policy settings restore the case for duration. In the UK and Canada, markets have oscillated between hopes of rate cuts and concern that central banks may yet need to keep policy tighter for longer. Even so, with activity losing momentum and real rates still elevated, parts of those curves increasingly appear priced for too much caution. In the US, softer labour-market data and the delayed effect of higher borrowing costs continue to support the view that rates are more likely to fall than rise over time, making periodic returns of the ‘higher for longer’ narrative look more like opportunities than a decisive shift in the outlook. Elsewhere, higher-quality sovereign bonds in parts of the euro area continue to offer some defensive value, while Japan remains a reminder that even modest policy adjustments can have outsized consequences across global rates markets.
Geopolitical risk, clearly, has not receded, and the latest escalation in the Middle East underlines how quickly sentiment can deteriorate. For now, however, this looks more like a rise in risk premia than the start of a renewed inflation cycle. A key distinction in 2026 is not just between different types of government bonds, but additionally between taking duration exposure in government bonds (which look relatively attractive), and credit markets, where valuations remain tight and less compelling to us.
Carry still matters
If the case for sovereign debt is improving, the case for broad credit exposure is becoming harder to make. Carry still matters, but investors are no longer being paid to take indiscriminate risk. Spreads remain tight by historical standards even as the cycle matures, refinancing pressures linger and geopolitical uncertainty remains high. In that environment, quality matters more.
The opportunity in credit is still there, but it appears narrower than headline yields suggest. In investment grade, that means considering issuers with resilient cash flows, stronger balance sheets and limited event risk. Dispersion is rising, and we believe that quality is becoming more important than broad market exposure.
We also see targeted opportunities in securitised credit, particularly in selected areas of the US market where structure and seniority can still improve risk-adjusted income. Higher-quality CMBS and senior AAA CLO tranches can offer spreads competitive with lower-rated corporate bonds, often with shorter spread duration and better downside protection. Data-centre securitisation is one example, especially where cash flows are supported by long-term contracts. But this is not a market for broad-brush enthusiasm: as supply grows, manager behaviour, collateral quality and documentation matter more, while consumer-backed sectors still warrant caution, in our view.
Three themes investors should not ignore
The third is private credit. The asset class continues to expand rapidly and remains an important source of corporate financing, but abundant capital can create vulnerabilities. Competition for deals has intensified, lender protections have weakened in some cases, and recent stress in subprime-linked pockets is a reminder that underwriting standards and diversification still matter.
