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Government bonds are back in focus, as investors reassess where value lies in global fixed income. With markets wavering over how quickly interest rates will fall, sovereign debt in several developed economies is starting to look attractive again to us.
Credit still offers income, but with spreads tight, the case for selectivity is growing. The debate now is less about chasing yield at any price and more about where investors can still find protection as well as returns. So where are some of the most compelling opportunities now emerging?
Government Bonds Are Reclaiming 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 U.S., softer labor-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 also between taking duration exposure in government bonds (which look relatively attractive) and in 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 securitized credit, particularly in selected areas of the U.S. 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-center securitization 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 behavior, collateral quality and documentation matter more, while consumer-backed sectors still warrant caution, in our view.
3 Themes Investors Should Not Ignore
There are three market themes that we believe will be especially important from here.
Fiscal Risk
The first is fiscal risk. Large deficits are forcing governments to issue heavily, increasing the sensitivity of long-dated bond markets to supply shocks. The U.S. is the clearest example, but the U.K. and parts of Europe are also facing renewed scrutiny over borrowing needs and bond supply.
AI-Driven Investment-Grade Supply
The second is AI-driven investment-grade supply. Hyperscalers and related issuers are ramping up debt issuance to fund multi-year capital expenditure plans, leaving 2026 on course to be a heavy year for borrowing. That matters most in the U.S., but the effects will be felt globally through spread markets and sector valuations. Balance sheets remain broadly solid, but leverage is drifting higher, and dispersion is growing.
Private Credit
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.
Navigating Shifting Fixed Income
The fixed income opportunity set is improving, but it is not improving evenly. Government bonds increasingly offer value and potential protection. Credit can still contribute income, but perhaps only where investors are selective enough to prioritize quality over reach.
In this market, the winners are less likely to be those chasing the highest yield and more likely to be those willing to combine sovereign duration with high-quality spread exposure and carefully chosen securitized assets, in our opinion. The next phase of fixed income will seemingly be about getting paid for resilience.
Owen Murfin is the institutional portfolio manager of fixed income at MFS Investment Management.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.