With countries’ budgets on the slide and companies’ balance sheets looking healthier, corporate debt deserves a prime place in portfolios.
For decades, sovereign debt has had an indisputable place at the centre of a core bond allocation. US Treasuries, German Bunds and UK gilts have historically been undisputed safe-haven assets and, as such, the natural cornerstone of portfolio construction. They are, effectively, liquid assets backed by politically stable countries, and, of course, they are fundamentally solid and deemed to be risk-free.
The key issue for bond investors is not knowing whether government debt is still important (as is indeed the case); rather, it is more a question of determining whether or not this sort of sovereign debt must continue to dominate core allocations as the budgetary situation for several developed countries deteriorates and political uncertainty is growing. In contrast, corporate balance sheets are improving.
The response, therefore, increasingly points towards a rebalancing so as to take the respective developments of these balance sheets into consideration. Before the Covid-19 pandemic, debt levels of countries and firms across the Atlantic were comparable at slightly less than 80% of GDP. Since then, there has been a clear convergence: public debt has reached 100% of GDP, whereas corporate debt has improved to 71%.
The most profitable segments of the credit markets should therefore shift from being a satellite allocation to a core one within investment portfolios. This development contrasts with the traditional core bond allocations, which have historically been more concentrated in the sovereign debt space.
Positioning for a world of higher nominal growth
Building portfolios that are more balanced between sovereign and corporate debt also means repositioning in an environment of higher nominal growth. Policymakers are increasingly under pressure to target strong nominal growth in an effort to reduce debt, with the era of budgetary austerity now seeming to be over.
In the current environment of geopolitical uncertainty, portfolio diversification, both in terms of geography and sectors, is becoming ever more important.
This trend is especially evident it the United States, where nominal growth has been above 6% for two quarters. It is manifesting itself through limited volatility in credit margins, with firms publishing revenues in nominal terms, which therefore remain robust.
In contrast, interest rate volatility tends to be higher in this sort of environment. The BofA Treasury Index, which tracks the performance of the US Treasury bills market, has thus seen an average volatility of 5.6% between 2020 and 2026, compared with just 3.6% between 2012 and 2019.
Opportunities outside the investment-grade segment
All-in yields remain high on the credit markets, including in the investment-grade segment; today, they stand at around 5.0%, compared with an average of around 2.5% since the global financial crisis in 2008. However, a breakdown of investment-grade market returns shows that most of the risk taken is, in fact, sovereign risk, with a small additional exposure to corporate debt. This suggests that a core allocation should split the sovereign and corporate risk more evenly.
As the investment-grade market is showing relatively high levels of interest rate sensitivity, more opportunities for relative value can be found elsewhere, including through a multisector credit approach. For example, this might consist of investing selectively in variable-rate bonds, BB-rated bonds, subordinated debt or collateralised loan obligations (CLOs). The aim is to generate quality revenue via diversified sources of returns in an effort to achieve solid performances throughout the whole cycle.
Given the current geopolitical uncertainty, geographical and sectoral portfolio diversification is becoming increasingly important.
From a sectoral perspective, a constructive view as regards technology names seems relevant. The dominance of ‘Tech Street’ over ‘Main Street’ continues to be seen, especially in the United States, where technology investments should continue to account for a greater proportion of GDP over the long term.
The global convertible bond universe is particularly well positioned to benefit from this environment: it offers a wide range of attractive opportunities in several sectors along the AI value chain, such as IT hardware and semiconductors, cybersecurity infrastructure and software, and providers of next-generation cloud computing, future energy and critical materials.
In a market as tough as that of 2026, a multisectoral approach to credit has proved invaluable.
Restructuring allocations in favour of the healthiest balance sheets
As sovereign risks increase, investors should reorientate their defensive portfolios towards diversified and quality income-generating assets, and towards credit in particular. The high level of returns, strength of companies’ fundamentals, and a selective exposure to duration offer attractive carry as well as advantages in terms of diversification, all while maintaining protection against shocks that might hit growth.
The opinions expressed herein are correct as at 23 October 2026 and are subject to change without notice. This information should not be relied upon by the reader as research or investment advice regarding any particular fund, strategy or security. Past performance is not a guide to current or future results. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
The views and opinions expressed by fund managers (internal or external) may differ from the house view. They are shared for informational purposes and do not constitute investment advice or a recommendation.
