Investors now see some corporate bonds as safer bets than government debt

In the $150 trillion global bond market, investors are coming to the conclusion that some companies are safer bets than even the most powerful governments.

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Corporates dealt with the rise in interest rates by keeping budgets lean, while governments continue to spend.

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In corporate boardrooms since the pandemic era, executives have dealt with the rise in interest rates by keeping budgets lean and reducing overall indebtedness. Meanwhile, governments in rich countries continue to spend, with the average debt-to-output ratio across the Group of Seven industrialized nations set to keep rising until the end of this decade at least.

The result: Investors demand lower yields for bonds issued by Microsoft Corp., Airbus SE, L’Oreal SA, and Siemens AG than they do for their countries of origin. While the phenomenon isn’t unprecedented, a combination of huge demand for corporate bonds plus fiscal backsliding is adding more and more companies in developed markets to the list.

‘A weakening of the safe haven status enjoyed for decades by a small handful of nations—the US foremost among them—is a sign populist politics is corroding the basis for tough fiscal compromises. Successive French prime ministers have so far failed to pass measures reining in the budget and in the US, the federal deficit is set to remain above 6% for the rest of president Donald Trump’s second term.

“[t’s the erosion of the perception of rule of law which keeps investors at bay,” said Pilar Gomez-Bravo, London-based co-chief investment officer of fixed income at MFS International. “Structurally we do feel that the regime is shifting. People prefer corporate balance sheets which are in better shape than some sovereigns.