The Great Bond Divergence: Opportunities Across Curves, Countries, and Credit

The Great Bond Divergence: Opportunities Across Curves, Countries, and Credit

Anu Rajakumar: After years when bond markets moved in near lockstep, driven by synchronized inflation shocks and central bank policy, global fixed income is starting to look meaningfully differentiated again. Correlations are breaking down, political and fiscal paths are diverging, and yield curves are telling different stories across regions. At the same time, investors are grappling with a familiar constraint. Spreads are tight, so where can you still find attractive income, diversification, and flexibility without making a dramatic sell the US call? My name is Anu Rajakumar, and today I'm joined by Paul Grainger, Senior Portfolio Manager on the Global Fixed Income team. Paul, welcome to the show.

Paul Grainger: Thank you for having me.

Paul, let's start with some of the macro backdrop for a while, especially during COVID and right after, it felt like everyone around the world was living through the same shocks, supply chains, the reopening surge. We saw policymakers around the world responding fairly similarly with big fiscal spending and then aggressive rate hikes, et cetera.

Fast forward to today, and policy paths look less uniform, and markets are starting to diverge. Why should investors pay attention to these shifts and the correlations that are starting to break down? What's driving it, and how does that create opportunity for investors?

Paul Grainger: I think the key point is what you've highlighted. There are opportunities for investors even in the current environment. I think the last three years generally rewarded a pretty straightforward approach to managing fixed income assets. You own duration to benefit from rates coming down. You own credit to benefit from the improved credit quality, but also the support to the economy from rates coming down. With hindsight, which is a wonderful thing, that was quite an easy trade to do. The question as we look forward is, where do we go from this when policy rates are closer to neutral?

They may not be there, but we're definitely closer. Credit spreads are tight. The macro and political risks are more varied across regions than they've been for some time. There is still income to be had from the market, but there's still the risk of volatility. The question really is, how do we deal with that? Part of it comes from what you said, that the correlations are breaking down. Correlations breaking down is not necessarily a bad thing. It actually provides opportunities to allocate capital between different regions, between different sectors of the economy, between different parts of the yield curve.

I do think that in the current environment, as part of a broader asset allocation, fixed income is really important as part of that diversification. The things that we'll be looking for as we go forward, for these correlations, but also the opportunities are geopolitics. Just to be clear, this isn't just about the US and what's happening there. Obviously, we read a lot about US politics, but it's also what's happening in different parts of the world. We've clearly got different political dynamics happening in different countries in Europe. We've got an election coming up in Japan, although that will be done by the time many of the listeners listen to this podcast.

We've also got a lot of tensions in the UK, where I sit, with risks around the government and challenges potentially to the leadership of the ruling Labor Party. All these things on geopolitics, coupled with different growth rates, different inflation paths and these varying fiscal constraints mean that the ability of bond markets and economies to move in sync is going to be challenged as we go forward. That is actually to us really interesting and also to our clients.

Anu Rajakumar: Excellent. Now, you've mentioned a few different areas and regions. Europe is not just one homogeneous block either. It's lots of individual countries. Tell us more about why that's important for folks to really consider.

Paul Grainger: I think actually that's a really important factor for investors, particularly for those investors who haven't historically invested in Europe. It's been quite easy for people in the past to look at Europe as one place and to say Europe's doing well, Europe's doing badly. Those relationships really broke down during the Eurozone crisis, and actually, they've flipped on their head since then. During the Eurozone crisis, I'm sure everyone remember, it was all about the periphery, Italy, Spain, Portugal, Greece struggling. They were really seen as the poor links, the poor relations in Europe, the bond markets you didn't want to own.

France and Germany were seen as the core stable markets where you wanted to allocate capital. That's really been turned on its head in the past few years, and it's been turned on its head for a couple of reasons. One is those periphery countries took their medicine. They went through some of the pain of having to tighten their fiscal budgetary positions. They've been through political changes. Some of them have more political stability than they have had in the past. At the same time, places like France have struggled to get its budget through in the past year, and there is more political uncertainty.

The political dynamics have shifted. To put it in context, in 2022, Italian bond yields were around 2% higher than French bond yields. That yield spread now is the same. Italian and French bond yields in the 10-Year maturity are trading at the same yield level. Now, part of that is due to this changing, shifting political dynamics. Part of it clearly is due to the fact that investors have chased yield and wanted to move down the credit spectrum. That's been underpinned by improving fundamentals. To give a bit of an insight into Italy and what's happening there in domestic politics, Giorgia Meloni has now been in power for more than three years.

This may not sound like a long time for many investors on the call or many people listening. To put it in historical perspective, and I think these numbers are right, but I'm sure someone will fact-check and tell me if I'm wrong, I think there have been 31 prime ministers in Italy in the last 80 years, with only 6 of those serving more than 3 years. It's a big shift to actually have someone who's getting policy done, but also getting policy done when having been prudent and having got more credibility from the market. I think if people had said that five years ago, there would have been question marks around that.

I guess where it leaves us is that, to your point that you raised, which is we have to look at Europe as a collection of countries, not a homogeneous block. As investors, that causes some challenges because the correlations are breaking down, but it also provides opportunity to allocate between those countries and not just think about allocating between the big blocks of US, Europe, and Asia.

Anu Rajakumar: Yes, that's terrific. That role reversal of some of those countries in Europe is really quite astounding. Maybe just to continue on this theme, you mentioned this global phenomenon, and just want to hear a little bit more. When you say global fixed income, how would you characterize the material differences between investing within the US bond market and investing globally? Also, just curious what parts of the global market do you think people often overlook that actually can deliver that yield and diversification?

Paul Grainger: I think if I had to sum it up in one word, it would be breadth. The breadth of the global bond market is far wider than the US bond market. It's not a negative on the US bond market. It's just the facts of where issuances come from governments around the world, from corporates around the world, and from the so-called supranational and sovereign and agency issues. Essentially, we have multiple currencies, more countries, and a wider set of issuer types. We have 76 countries in the global bond index. We've got 29 currencies. We're able to rotate capital around those .

More importantly, from a benchmark or a universe perspective for clients, what it means is you get some natural diversification. I guess it links to your earlier question about correlations. Post-COVID, correlations were really high. Markets, economies were moving in lockstep, particularly in developed world. Even in developed markets now, we're starting to see divergence between those countries and those currencies. That gives a natural, almost hedge or natural cadence to these global portfolios that means that you're not putting all your fixed income risk in one country and one currency related to one economy.

That is really powerful. It should be noted as well that the global bond index [ND1.1]does have some exposure to the so-called emerging markets, even though in this index, it is only investment grade. It's the higher-quality emerging markets there. Why is that important? It's important because for some time, they've taken a different path in terms of their economy, their monetary policy. They were earlier in raising rates than we were in the developed world. That means that we're now seeing a lot of opportunity come out in emerging markets. That, again, gives this natural diversification from being in global fixed income.

One thing that I will highlight that I think is a bit different when we look at the global bond market than just the US market is this so-called supranational sovereign and agency paper. These are bonds that are issued by entities that are linked to governments. They are very high-quality, typically AAA or AA. They can actually be higher quality than the individual governments because of the cross-governmental guarantees that come through. They're a big part of the benchmark. They're 20% of the benchmark. We're fortunate that we can access that market in a liquid way.

Anu Rajakumar: Yes. No, that's very fair. Last question, you talked about the breadth of the opportunities, potentially rotating capital across dozens of countries and currencies to find that income and diversification. Paul, I want to touch on the US dollar as well. Of course, it depreciated quite significantly in 2025. General consensus is that it'll continue to depreciate in 2026, perhaps not to the same magnitude. I'd love to hear about your views on that and how that affects the opportunity set.

Paul Grainger: Clearly, the dollar depreciated quite materially. There are a lot of forces at work, geopolitics, but also the fact that the Federal Reserve were cutting interest rates. We continue to think, as we said, the Fed will cut interest rates as the market's pricing. There are risks to the downside with a new Fed chair. However, the dollar can still come under pressure, but that is not necessarily the reason to be in global fixed income and to diversify and have a broader opportunity set.

The reason for a broader opportunity set is because of the potential for returns from that opportunity set, irrespective of what the dollar does, but also the ability to diversify and the ability to tap into other markets. Just to be clear, this isn't a dollar trade. This isn't the sell the US and buy everything else. This is part of a natural allocation that should be there in portfolios.

Anu Rajakumar: I think that's a really important differentiation. This is not just a currency play, right?

Paul Grainger: Absolutely.

Anu Rajakumar: Now, if we go region by region, I'd love to hear about where your team is seeing the most interesting relative value opportunities, and what are some of the risks you're watching most closely, and further to that, any areas that you are actually avoiding at the moment?

Paul Grainger: I think in relative value opportunities, we always have to bring it back to what's being priced in by the market. We're constructive on European fixed income, and part of that is that we see European growth disappointing. We see ability for the European Central Bank to cut interest rates further. Right now, the market is pricing no further interest rate cuts from the ECB. That is an opportunity to allocate capital at relatively attractive European yields, but also benefit from what we think will be interest rate cuts. That contrasts slightly with the US, where, again, we see the scope for interest rate cuts, but the market is already pricing that to some extent.

We're much more driven there by the trading range environment that we're in. You put those two together, and it means that we are looking to be within global portfolios, overweight Europe relative to the US. Another area that I think until a few years ago people weren't really focusing on was Japan. Japan had been a market that no one had invested in, really, as an overseas investor or an international investor for many decades. That changed two or three years ago. We think there's a really interesting opportunity in Japan. There is volatility.

We do think that that market, which is pricing in, I think, three interest rate hikes now, is obviously looking at a very different place to other global bond markets. We don't think that we'll get three interest rate hikes. We think on that basis, there is value in the market already. The yield curve is relatively steep because of concerns about fiscal issuance and the ongoing funding of the government. We actually think that that will provide an opportunity

I don't think there are areas that we're particularly negative or concerned about within fixed income.

What I would say is that within credit, credit spreads are tight. That comes down now to really focusing on where are the good quality companies, where are we going to be able to harvest some incremental income, some incremental returns, but also accept the fact that we will get bouts of volatility coming through there. We are relatively defensive, but do think there will be opportunities coming up

Anu Rajakumar: Terrific. You laid up the next question yourself. Turning to credit, as you said, lots of questions are about tight spreads at the moment. Where are the good opportunities within credit? How are you approaching the area? What are the concerns that you have around credit?

Paul Grainger: I think the first thing I'll say is that we spend a lot of our time, like other fixed-income investors, focusing on spreads. Actually, we should be clear that across the fixed income universe, all-in yields still look relatively attractive. We should be clear that corporate bonds still give you income, so they still have a place in people's portfolios. When we look at the relative spreads and the relative pricing between corporates and governments, clearly, we're at a narrow end of the range that we've been in for some time. Spreads are tight for a reason.

They're tight because we've had improved credit quality, the positive growth environment we've been in, the support that we've had from central banks with interest rates being cut. Also, like every asset, they're driven by supply and demand. We've seen a lot of demand for fixed income and a lot of demand for corporate bonds. We think that will continue as we go through the year because there is this demand for income, because income gives you the cushion to the rest of your portfolio. To think about the question of where are the opportunities, the opportunities we think now are going to be in relative sector calls, looking at different issuers that come.

Also, we know there is issuance coming to the market, and we can harvest some of that new issue premium. Clearly, one of the things we've seen recently is that the AI-related names, credit spreads have widened.. Now, clearly, that's something that has been happening, but looking forward, we do think there's going to be opportunity in those names as well. Timing is not necessarily today, but these relative repricings will provide opportunities for us to allocate capital.

We're also going to have to think carefully about where we allocate on the yield curve. Do we allocate to shorter-dated bonds or to bonds that are further out the curve? We're going to continue to see that. I think the key thing I would say is that in this environment, we're not in an environment where the rising tide of demand lifts all boats and all assets. We're going to have to be much more nuanced about where we're allocating capital. We're going to have to really focus on research, in-depth analysis of the company, staying engaged, and being cognizant of the risks around us.

Anu Rajakumar: Yes, no, and to your point, in an environment where we think there's going to be above-trend growth for 2026, fundamentals still look solid, that credit is something that can continue to stay on the table for most investors, I think. On implementation, if an investor wants global exposure but also wants to stay nimble, how would you suggest that they go about building that into a portfolio?

Paul Grainger: That's a great question because I think everything we've talked about is-- The fixed income's attractive, but it's going to be more nuanced. There's going to be more volatility around that. I think that's actually the benefit of a global fixed income approach is that you can allocate capital relatively quickly between the sectors, between countries, and to different parts of the yield curve should opportunities arise. I think for us, that says have a broad approach. It says allow flexibility, but flexibility within bands or within bounds, we obviously have ranges that we will look to allocate to duration to curve to different countries.

I think the key here is that we need to think about every part of the market separately and look at how they trade relative to each other, and look at those opportunities. As I said before, we need to really understand that even in places like Europe, it's a collection of different countries. When we think about Asia, it's a collection of different countries, and there will be opportunities coming across there.

I think that the key part here is this is a liquid market. This is public bonds. They're liquid. We can reallocate capital really quickly, and we can redeploy as opportunities arise. Really, why do we see this global universe as being a natural part of investors' asset allocation?

Anu Rajakumar: Excellent. Maybe just one final follow-up there. Tell us where emerging markets fit into this discussion.

Paul Grainger: As I alluded to before, I think emerging markets have been in a slightly different cycle to developed markets. One could say that emerging markets reacted to the inflation threat a lot earlier than developed markets. Now granted, their inflation basket is very different to developed markets, but they reacted earlier, they tightened policy earlier, and that means that they're in a slightly different place in the cycle. Emerging markets were also an asset class that saw, up until recently, net outflows. There's not a lot of crowded positions there.

We're certainly starting to see a lot of opportunity in emerging markets from the fundamental side, from valuations, and from technicals. We're also starting to see clients reallocate capital to emerging markets as they search for added income. I would say that the valuation metrics for emerging markets relative to credit right now are still attractive

Anu Rajakumar: Excellent. Thank you very much for those comments. Paul, I can't let you go without a quick bonus question. Of course, the market environment is very volatile. I'd like to know what you tend to do to help you reset and think clearly outside the office.

Paul Grainger: Oh, that's a good question. [laughter] I actually play quite a random esoteric sport that many people on this podcast won't have heard of, called real tennis.

Anu Rajakumar: Oh, gosh. Tell us more about real tennis.

Paul Grainger: Real tennis is essentially Henry VIII's version of tennis. [laughter] One of the few similarities is it has a ball, it has a net, and it has a racket. The differences are it's an enclosed court. You can play off any wall. There are certain hazards there, or nets that you can hit, that you get bonus points that automatically win the point. You also play with a wooden racket that is not symmetrical.

I would encourage anyone who's interested, look it up online. It's completely random. The scoring is also relatively complicated as well. It is quite good to disconnect from work, because you have to concentrate on trying to hit a ball that is hand-sewn, so it doesn't bounce the same way. The scoring is slightly random. I would say that it's -- You can either try and play the point or remember the score. It is something that--

Anu Rajakumar: [crosstalk] [laughs] You can't do both.

Paul Grainger: You can't do both. It is something that requires a lot of concentration. It does mean that you switch off quite meaningfully from work.

Anu Rajakumar: I love that. Thank you so much for sharing that. It's a fun fact about yourself. Paul, this is a great discussion today. Maybe just to quickly summarize a few of the comments that you said. You mentioned that investors shouldn't abandon US assets and follow that sell the US trade. Our conversation was really about the marginal allocation decisions that really are starting to matter more as markets and policy paths diverge.

We talked about correlations that have come down, and the global fixed income opportunity set really looks more differentiated that has it in recent years.We talked about rotating capital and accessing dozens of countries and currencies to find income and diversification. You've talked about some of the views that the fixed income team has at the moment, at Neuberger, overweight Europe versus the US, where there could be potential mispricing from the ECB. You also highlighted Japan as an area that's attractive due to the valuation opportunity and the steep yield curve there.

Then, finally, hopefully, I'm summarizing this fairly, that in an environment of tight spreads, the combination of income diversification flexibility plus the ability to be nimble when those dislocations appear, can be especially valuable for investors. Hopefully, I summarized that okay for you. [laughs]

Paul Grainger: That's absolutely perfect.

Anu Rajakumar: Excellent. Paul, once again, thank you so much for being on the show, and good luck in your next real tennis match.

Paul Grainger: Thank you very much.

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