With yield premiums (credit spreads) over government bonds currently narrow, many investors are asking whether corporate bonds still offer sufficient value. This is one of the central questions shaping investment decisions in international bond markets today.

Opinions differ. Shaan Raithatha, Senior Economist at Vanguard, recently stated that tight spreads do not adequately compensate for the additional risk of either investment-grade or high-yield corporate bonds. Similarly, Pimco credit analyst Nicola Mai has described corporate bonds as generally unattractive at present.

A Case for Corporate Bonds

Finews met Felix Freund in early February at Aberdeen Investments’ Zurich office to discuss the opposing view. Freund, based in Edinburgh, has been with Aberdeen for fourteen years. He manages several euro investment-grade and aggregate mandates (with a relatively small high-yield allocation) for institutional clients and is responsible, among others, for the Euro Corporate Bond Fund (Sustainable) and the Global Corporate Bond Fund (Sustainable). It is therefore no surprise that he makes a strong case for euro-denominated corporate bonds.

«Yes, spreads are quite tight,» he acknowledges. «But what matters to investors is the absolute yield level, and that is attractive.» He also observes substantial inflows into corporate bond products.

The US Continues to Set the Pace

«The market environment remains supportive.» In the US, AI-driven investment is fueling economic growth, and consumption remains strong. «However, an increasing share of consumption depends on the highest income bracket. Half of total consumption is accounted for by the wealthiest 10 percent of US consumers.» Announced corporate tax cuts are providing additional support.

«The US economy, US capital markets and Treasuries remain decisive for developments in the rest of the world,» Freund notes. Europe’s outlook is also favorable, particularly due to fiscal programs in Germany. Against this backdrop, Aberdeen continues to expect solid corporate earnings, with the exception of well-known problem sectors such as automotive and related suppliers.

«Historically, losses in the investment-grade segment have always been very small.»

Given modest yield premiums, do corporate bonds still make sense? Why not allocate entirely to government bonds? Freund advises against forgoing the credit spread.«Even though the cushion used to be larger, first, investment-grade losses have historically been very small. Second, deteriorating public finances are putting pressure on sovereign spreads. Third, banks have become much more stable and profitable.» Bank bonds account for 30 to 35 percent of the relevant bond indices he follows.

While Freund remains broadly constructive on investment-grade bonds, he does not ignore potential risks.

Another Record Year for Issuance?

Massive investments in AI and related infrastructure, along with increasing debt-financed acquisitions, are likely to boost bond supply further in 2026, potentially setting another issuance record after 2025. «This will not place undue strain on balance sheets overall,» Freund says, downplaying concerns about an AI bubble in the bond market. He expects the investment cycle to continue for several years, drawing parallels with the prolonged TMT boom of the 2000s.

For bondholders, what matters is that issuers fully meet their obligations—timely coupon payments and principal repayment. Therefore, credit quality and balance sheet development are crucial. Bondholders do not benefit from companies taking high risks today in pursuit of potentially large future profits; if the upside materializes, shareholders—not bond investors—capture it.

«Even if hyperscalers’ investments prove unprofitable, their leverage ratios would deteriorate only marginally.»

«Hyperscalers have low leverage and generate strong cash flows. Even if their substantial investments were to prove unprofitable, their balance sheet metrics would deteriorate only marginally.»

Oracle is somewhat less robust and serves, in Freund’s view, as a bellwether for the lower-quality segment. Among infrastructure providers and data center operators with speculative ratings, correction risk is considerable.

«If the cycle turns, we could also see defaults in loans and private debt.»

«If the cycle turns, defaults could occur here—not only in the high-yield segment, but also in loans and private debt, such as direct lending,» Freund and his team therefore monitor trends in these markets very closely. Citing a recent example, he notes: «All markets reacted with markdowns to the prospect that AI could disrupt the business models of software providers.» Many IT companies are cash burners and therefore have weak balance sheets.

However, the fixed-income expert does not focus solely on company-level fundamentals. He also closely analyzes macroeconomic developments in order to better understand movements along the yield curve.

Why Long-Term Yields Remain Stubbornly High

Following the post-pandemic inflation surge in 2022/23, many central banks responded by raising policy rates but have since embarked on an easing cycle. Nevertheless, the yield curve looks markedly different from the past, with longer-dated bond yields remaining at relatively elevated levels. Is this a positive sign—reflecting expectations of stronger future real economic growth—or a negative one, signaling persistently elevated inflation expectations?

Freund does not subscribe to a single-cause explanation for the steep yield curve. «Inflation in both the eurozone and the US is largely under control. The debate about the Fed’s independence may play a role.» More important, however, are structural factors: «The market is in the process of redefining what constitutes a safe asset. Governments are accumulating more debt, increasing the supply of sovereign bonds. At the same time, central banks are stepping back as buyers, dampening demand.»

The Dutch Pension Fund Factor

Additional technical factors are also at play, such as the ongoing transition among Dutch pension funds. As part of this process, they are reducing the duration of their bond portfolios—purchasing fewer long-dated bonds and entering into fewer interest rate swaps. This, too, is exerting upward pressure on the long end of the yield curve.

Freund cautions against lumping all sovereign bond markets together. «Since early 2025, divergence between the US, the EU and Japan has been increasing.» In the eurozone, however, he does not expect major rate moves in the coming months. In other words, most of the return investors can expect from such bonds will come from carry. «Positioning along the yield curve will be decisive.»

«Positioning along the yield curve will be decisive.»

The Aberdeen fund manager is also familiar with the Swiss bond market—yet currently holds no Swiss franc-denominated bonds.

«The market is generally expensive due to strong demand and relatively limited supply, meaning that even after currency hedging, exposure rarely makes economic sense for us,» Freund concludes.