• Does a bond allocation still make sense in a portfolio in today’s market environment? 

In the short term, we do not foresee any rate cuts. The Fed and the ECB are either above or around their inflation targets and given that we remain in a world of very high fiscal deficits, it is hard to see yield curves flattening significantly. However, looking further ahead, over a 3–6-month horizon, the situation is different. Real rates are historically high: around 1.8% in the US [1], the highest since 2008, and 0.7% in Europe [2], the highest since 2010. This raises the question if we should really avoid fixed income when rates are at historically elevated levels. Wasn’t the pre-2022 situation, with real rates at -1%, the one that was dangerous? 

• What are the alternatives to bonds? Is it still relevant to invest in Treasuries?

Fixed income provides regular income. Today, among possible alternatives that are both fairly valued and as liquid as bonds, we don’t see any. On one side, there is private debt, which also provides regular income, but we do not consider this segment to be properly valued; on the other side, there is real estate, which lacks liquidity. As for Treasuries, the short end of the curve may make sense, while the long end appears more volatile given the uncertainties surrounding fiscal policy. 

• What type of bonds remain attractive?

It all depends on the macro scenario. From our perspective, we have no specific concerns about the macro environment; we believe growth is holding up better than expected and that the risks of deep recessions have receded. In this context, it is preferable to focus on solutions that offer the highest carry, namely High Yield and subordinated debt. 

• How should High Yield be integrated into a bond allocation today: a tactical opportunity or a strategic pillar?

Today, High Yield is both a tactical opportunity and a strategic pillar. Most High Yield companies have strengthened their balance sheets since the last crisis. They now show more prudent leverage ratios and better liquidity management. 

Admittedly, spreads are historically tight, but yields remain protective, offering a useful cushion against rate volatility. Depending on the geographic region, investors can also play different growth dynamics—for example, cyclical sectors in the U.S., supported by a stronger economy and a deep market, and more defensive sectors in Europe. So yes, High Yield still has its place as a tactical opportunity within a bond allocation for those looking to lock in attractive yields. 

High Yield can also be viewed as a strategic pillar. Historically, High Yield was associated with traditional sectors. Today, around 25% [3] of the market is exposed to long-term structural trends: Technology, Demographics, Climate and Energy Transition, and Urbanization. 

In this context, this segment of High Yield can be used to bet on tomorrow’s winners. A striking example: Tesla, rated B in 2017, is now BBB, while Renault, conversely, moved from BBB to BB+. 

These developments show that High Yield can be a gateway to innovative companies that are improving in quality, while also benefiting from the tightening of credit spreads that reflects this improvement. To sum up, integrating High Yield into an allocation allows, from a tactical perspective, capturing a protective carry, and from a strategic perspective, playing the innovation theme — which is very present in the equity market but less embraced on the credit side. In a world where sovereign debt alone is no longer sufficient to generate returns, High Yield clearly deserves its place in a balanced fixed income allocation.

[1] Market data 

[2] Market data 

[3] Market data 

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Source: Groupe La Française, January 2025. 

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