Fixed income CIO view
Yields are up, but not all yields are created equal
Rising yields in developed market government bonds may offer buying opportunities, but take care with French debt.
While it is premature to adopt an outright bullish stance, it’s clear that developed market government bonds are no longer as overvalued as they once were. But it pays to be discriminating. Had George Orwell written Bond Farm instead of Animal Farm, he might have said, “all OECD bonds are equal, but some are more equal than others”.
Treasuries are no longer an obvious underweight
Buying opportunities for US Treasuries are emerging. The reason is simple. They finally offer some value again. Relative to their own recent history and relative to equities, much of the extreme overvaluation has been worked off.
Admittedly, we are still in an inflationary boom period, which continues to be a headwind for government bonds. But real yields are approaching levels that have historically put stress on parts of the economy. The asymmetry has improved enough to justify a change in positioning. In addition, the potential for more aggressive Treasury buybacks under Secretary Scott Bessent could provide some technical support to the market.
That does not mean we should expect a sustained Treasury rally. Growth remains too strong, while supply from both the Treasury and corporate issuers remains too abundant. But yields are now high enough for government bonds to earn their place in portfolios again, offering meaningful real income with valuable diversification benefit.
Put simply, holding US Treasuries, even if primarily as a hedge against a potential growth disruption, is considerably more attractive than it was a few years ago.
With the Federal Reserve's next few moves largely priced, the more important question is where higher real rates might begin to break things. Corporate earnings and defaults are key indicators. So far, aggregate corporate earnings remain resilient. Stress has been concentrated in CCC credit, where spreads have widened as default risk has risen. That is unsurprising given the vulnerability of these borrowers, and the segment remains too small to pose a broader systemic concern.
What would concern me more is weakness spreading into single-B credit, particularly among highly leveraged cyclical sectors such as consumer cyclicals, software and communications. That would be a clearer signal that higher rates and tighter financial conditions are not just an equity valuation challenge, but beginning to damage the broader economy.
French bonds – don’t try to catch a falling knife
Numbers matter. France is running a debt-to-GDP ratio of around 120%.1 Long-term interest rates are now more than 100 basis points above nominal GDP growth. Fiscal deficits remain in the mid-5% range. More than 60% of government debt is held by foreign investors.2 France cannot devalue its currency because of the euro. And a major election is approaching, making meaningful policy decisions extremely difficult.
These are not comforting dynamics.
French sovereign spreads have widened significantly, to levels last seen around the euro-area crisis. It is important, however, to distinguish between the global bond-market beta and France-specific risk. Part of the move reflects the broader sell-off in global government bonds; stripping out that beta, the idiosyncratic widening in France is less dramatic.
A full-blown sovereign crisis still feels remote. Since 2012, the euro area has built meaningful financial backstops that substantially reduce default risk and the probability that stress in one sovereign develops into a systemic crisis.
Italy in 2018 may therefore offer a more relevant comparison than the euro crisis. If France were to follow a similar path, spreads could widen towards 300 basis points and remain elevated for a prolonged period.
At the same time, it is difficult to see the catalyst for a meaningful and sustained tightening in French spreads. That would likely require a material improvement in the country's fiscal trajectory, which I do not expect anytime soon.
Simply put, French spreads may already have widened considerably, but the risk-reward still looks asymmetric. They remain a falling knife I would be reluctant to catch.
Jenny Zeng is CIO Global Fixed Income at AllianzGI. Having recently relocated from Hong Kong to London, she brings a genuinely global perspective to the biggest questions facing bond markets.
1 Source: France meets fiscal reality with a crunch, Financial Times. 1 October 2026
2 Source: France's public debt soars above €3.5 trillion, Le Monde. 25 June 2026
