By 2026, sovereign fiscal positions are structurally loose across DMs, with US deficits around 6–7% of GDP and debt at/above 120% of GDP KKR p.65; T. Rowe p.3; Stifel p.40; Barclays p.5–6]. The consensus is that this keeps long‑end yields higher than in the 2010s but broadly range‑bound (US 10y clustered around 4–4.5% in most base cases) rather than in a spiral KKR p.61; JPM p.5; BofA p.2; UBS p.60; Goldman p.13]. The sharpest divide is how the system equilibrates: via higher term premia and weaker bond hedging (BlackRock, T. Rowe, KKR, MS) versus via financial repression and anchored yields despite debt (UBS, MS, Barclays, HSBC). Decision‑critical datapoints: US ~1/3 of debt refinancing in 2026 with ~$1.5tn net coupons and a five‑year funding gap of $5.5tn Barclays p.6, p.20], and G7 debt projected to ~137% of GDP by 2030 UBS p.36]. Most agree core DMs run large fiscal expansions (OBBBA in US, German stimulus, France/UK deficits), while several EMs are moving the other way with upgrades and improved debt metrics BlackRock p.14; HSBC p.5; T. Rowe p.4].
Into 2026, the investable consensus is that DM sovereign supply will remain heavy and deficits structurally large (US ~6–7% of GDP; G7 debt heading toward 137% of GDP) KKR p.65; UBS p.36], keeping long‑end yields in a higher‑for‑longer 4–4.5% UST band and eroding the unconditional hedging value of duration. Positioning should treat long sovereigns as selective, regime‑dependent hedges rather than the core ballast of portfolios, with greater reliance on curve shape, inflation‑linked and EM/local sovereigns, and alternative assets to manage fiscal‑driven term‑premium risk.
| Source | Content |
|---|---|
| Brookfield Outlook | Sovereign governments are described as facing “record debt levels,” which constrain their ability to fund large capex needs and push them toward innovative capital partnerships and privatizations [pp.6, 9]. Discussion of debt sustainability is purely qualitative and framed through limits on public funding capacity. [p.?] |
| Goldman Outlook | Global government debt exceeds $100tn and fiscal sustainability is framed as a key structural risk, with US debt‑to‑GDP approaching a post‑war high, an “unusually large” deficit relative to economic strength, and higher real rates steepening the path of interest expenses [p.6]. Political fragmentation and weak reform capacity in France are sharpening concerns about a deteriorating fiscal outlook, with fiscal anxieties seen as medium‑to‑long‑term risks whose precise timing is impossible to pinpoint [p.6]. Structural spending pressures from defense, climate transition, healthcare and pensions are highlighted as long‑run drivers of fiscal strain rather than triggers of an imminent crisis [p.6]. |
| Blackrock Outlook | Public‑sector balance sheets are described as “already highly leveraged,” with U.S. government debt at post‑war highs (roughly 100–120% of GDP in the chart) and elevated debt‑servicing costs that raise term premia and system vulnerability to bond‑yield spikes tied to fiscal concerns [p.7]. A more leveraged system heightens policy tensions between fighting inflation and containing debt‑servicing costs, and indebted governments are seen as having less capacity to cushion shocks, though AI‑driven productivity could ease debt burdens only over time [p.5][p.7]. |
| Goldman Outlook - Summary | Rising uncertainty around US fiscal health and an increasing budget deficit is highlighted as a key risk that must be balanced against AI‑driven growth and higher government spending. [p.5], [p.11] Europe’s increased fiscal flexibility, including Germany’s easing of the debt brake for defense and infrastructure, is cast as growth‑supportive, and Japan’s shift toward looser fiscal policy is similarly not linked to stress. [p.5], [p.14] |
| Barclays Outlook | Elevated and rising public debt in DMs is framed as a structural headwind, with US gross public debt at 123.6%/124.7%/125.7% of GDP (2024/25F/26F), eurozone at 87.4%/88.2%/89.9%, UK roughly flat around 93% and France above 110% of GDP with persistent deficits and no credible fiscal roadmap [p.5, p.9, p.11, p.20]. The US faces a fiscal deficit around 7% of GDP, $1trn annual net interest payments and nearly one‑third of the national debt to be refinanced in 2026, driving crisis‑type concerns about “every single basis point” and a $5.5trn funding gap over five years [p.6, p.20]. France is highlighted as a key sovereign‑risk hotspot with downgrade risk and crisis‑era spread levels, while aggregate eurozone and UK trajectories are seen as more contained but still constraining growth and policy space [p.9–11, p.20]. |
| HSBC Outlook | Moderate growth and high debt piles in DMs are linked to rating downgrades, while many EMs benefit from sovereign rating upgrades driven by responsible budget management and better growth [p.3, p.5]. In the US, the negative fiscal trajectory is judged to have peaked with the OBBB Act, which lays out an eight‑year fiscal path such that deficits are viewed as already embedded in the long‑end term premium [p.21–22]. France (debt and election concerns) and JGBs (debt sustainability concerns) are underweighted, while Italy and Spain are seen as having healthier fiscal outlooks; UK growth and borrowing costs are framed as highly sensitive to the degree of fiscal tightening [p.5, p.20]. |
| MS - 2026 US Equities Outlook - The Rolling Recovery Is Here | With US debt and deficits “so high as a percentage of GDP,” policymakers are portrayed as having “no choice but to let inflation run hot,” targeting nominal GDP of ~6–7% versus borrowing costs near 4% to lower debt/GDP over years or decades, akin to post‑WWII financial repression but facing weaker demographics and relying on both real growth and inflation to avoid sustainability stress. [p.11–12] The US current account deficit of –4.4% of GDP, roughly doubled since COVID, is highlighted as an additional vulnerability that policymakers seek to address via tariffs and potentially a weaker currency. [p.9] |
| JPAM Outlook | Fiscal stance is expansionary across the U.S., Europe and APAC, with the U.S. “One Big Beautiful Bill Act” adding ~1 percentage point to 2026 GDP via tax cuts and higher defense/critical‑industry spending, and explicitly flagged as potentially raising “concerns about the long-term deficit” [p.11]. Europe’s ramp‑up in defense spending (some calling for 5% of GDP) and German infrastructure investment are framed as growth-supportive, and “ongoing fiscal challenges” are acknowledged [p.11]. Recession probabilities of 30% (U.S.) and 25% (eurozone) are “just above historic averages,” implying a non‑crisis sovereign backdrop [p.11]. |
| KKR 2026 Outlook | Developed‑market public debt is up ~1,000bps of GDP since COVID, with U.S. deficits modeled at roughly 6–6.6% of GDP through 2029 ($1.8–2.2tn), described as “stabilizing” with limited political appetite to push deficits much above 7% of GDP [p.13][p.65]. High debt burdens and sustained deficits are flagged as upside risks to yields but not as an imminent sovereign crisis, while China’s official and augmented deficits near 4% and 8.5% of GDP, respectively, are framed as part of an expansionary stance rather than a sustainability stress [p.50][p.77]. Japan’s use of fiscal packages (e.g., JPY 17.7tn, 2.8% of GDP) is accommodated by negative real rates, implying managed, not destabilizing, debt dynamics [p.51][p.66–67]. |
| JPM Outlook | Rising U.S. debt levels and inflation uncertainty are flagged as structural risks that warrant diversification into other developed sovereign bonds [p.5]. Government investment growth is used as a proxy for fiscal stance, with 2022–26 showing stronger public investment versus 2010–19, especially in the eurozone, signaling an end to broad fiscal austerity [p.9]. |
| RIC 2026 BAML | n.a. |
| Stifel Outlook | Persistent U.S. fiscal deficits of 6%+ of GDP are described as structural, with revenue around 18% and spending above 24% of nominal GDP, projected to continue through at least 2029, and these deficits are framed as “money creation” that supports profits but puts downward pressure on equity valuation multiples over time. [p.38–40] |
| TRowe Outlook | U.S. government debt exceeds 120% of GDP and fiscal policy (including OBBBA, tariffs, immigration restrictions) is highly expansionary, with projected fiscal spending rising by an amount equal to 23% of current GDP over 10 years, raising questions about long‑run debt sustainability and complicating a return to 2% inflation [p.3]. Expansionary fiscal policy in the U.S., UK, Germany, and France is forcing greater deficit financing via new debt issuance, pushing governments to offer higher yields and elevating concerns about sustainability [p.11]. Germany’s debt/GDP is around 61.9% (Maastricht definition) and is also entering a phase of “very large fiscal expansion,” adding to sustainability questions over time [p.3–4, p.11]. |
| UBS Year Ahead | G7 gross government debt has risen from ~85% to ~126% of GDP over two decades and is projected by the IMF to reach ~137% by 2030, driven by aging populations and higher defense spending, with current policies in some countries implying government spending is at “escape velocity” absent decisive action [p.36]. Meaningful fiscal consolidation is judged politically unlikely—France’s deficit-reduction plans were blocked, US parties do not prioritize deficit cuts, and Japan chose more stimulus—so elevated debt and deficits will persist, creating recurrent debt-sustainability and rating-risk episodes that can lift yields or FX volatility and threaten equities if yields rise rapidly [p.37, p.47]. Financial repression is framed as the main medium-term tool for managing these high debt loads by suppressing real borrowing costs [p.36–37]. |
| Source | Content |
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| Brookfield Outlook | n.a. |
| Goldman Outlook | Long‑end yields are more susceptible to fiscal concerns and inflation expectations, contributing to rising 30‑year yields and curve steepening, with a chart explicitly stating that rising 30‑year yields in France, UK, Japan, Germany and the US “partially reflect concerns over debt sustainability” [p.13]. Higher real rates steepen the path of interest expenses for high‑debt sovereigns, reinforcing structurally higher term premia at the long end, while front‑end yields remain more policy‑anchored [p.6], [p.13]. |
| Blackrock Outlook | Elevated public‑sector debt and rising debt‑servicing costs are cited as a key reason term premia are increasing and pushing up long‑term bond yields, supporting a structurally higher cost of capital [p.4][p.7]. In the U.S. and Japan, heavy issuance, high servicing costs and price‑sensitive buyers are expected to keep long‑end yields elevated, driving underweights in long‑dated Treasuries and JGBs [p.7][p.16]. Euro‑area long‑end pricing is seen as already reflecting higher German issuance, while EM sovereign spreads sit near decade lows partly due to limited issuance and stronger balance sheets [p.14][p.16]. |
| Goldman Outlook - Summary | Rising US fiscal uncertainty and larger deficits feed into a strategic bias toward curve steepening in the US and Europe, with long‑term structural trends (including fiscal dynamics and higher supply) expected to keep upward pressure on long‑maturity yields/term premia. [p.5], [p.11] European fiscal expansion, particularly Germany’s significant increase in spending, is treated as adding to supply and steepening forces, while in Japan looser fiscal policy alongside BoJ hikes points to higher JGB yields as YCC is left behind. [p.14], [p.18] |
| Barclays Outlook | Persistent high debt and large issuance are expected to remain a central concern “particularly for long-dated bonds that are highly sensitive to increasing supply,” with US net coupon issuance around $1.5trn in 2026 and further increases thereafter, adding term‑premium pressure [p.20]. France’s 30‑year OAT–Bund spread breaking above 100bp (back to euro‑crisis levels) and structurally weaker UK gilt demand due to pension reforms are cited as examples of fiscal and supply factors driving higher long‑end risk premia and volatility [p.20]. Some room for yields to decline remains via lower policy rates if growth underperforms, but with limited scope given current rate pricing [p.18–20]. |
| HSBC Outlook | US deficits associated with the OBBB Act are assessed as “likely already priced in the term premium of longer UST yields,” with the negative fiscal narrative now largely behind markets [p.21–22]. A stable US Treasury coupon supply and the scheduled end of Fed QT in December are expected to support longer maturities, contributing to a view that DM government bond yields, including USTs, should remain range‑bound rather than experience renewed fiscal‑driven spikes in term premia [p.22]. EM LCD term premia are implicitly supported by high real policy rates and improved fiscal/ratings dynamics, particularly in Mexico and South Africa [p.23]. |
| MS - 2026 US Equities Outlook - The Rolling Recovery Is Here | Long‑end yields are expected to remain “contained” through a mix of easy monetary policy, reduced back‑end issuance, and Treasury buybacks, even as high debt/deficits require continued funding, implying suppression of term premia relative to nominal growth. [p.11, p.22] Funding needs are increasingly met via greater T‑bill issuance relative to notes and bonds, supported by Fed liquidity tools, which limits pressure at the long end despite large fiscal deficits. [p.11] |
| JPAM Outlook | n.a. |
| KKR 2026 Outlook | Long‑run U.S. 10‑year yields are anchored around ~4% (4.25% in 2026, 4.0% in 2027) off a neutral fed funds of 3.375%, with upside risk from high debt burdens, sustained fiscal deficits, and potential capital‑flow disruptions [p.61–62][p.77]. U.S. Treasury supply and the Fed’s balance sheet (stabilizing near 22% of GDP) have “started to stabilize,” limiting extreme term‑premium spikes even as bond yields become structurally more volatile [p.65]. Comparable long‑end anchors are given for Bunds (~3%), JGBs (~1.9–2.1%), and CGBs (~1.5–1.6%) for 2026–27, consistent with higher but bounded term premia across regions [p.61]. |
| JPM Outlook | Fiscal concerns and rising debt are linked to elevated long-term yields and a modestly steeper curve, with 2-year U.S. Treasuries projected at 3.50%–3.75% and 10-year Treasuries at 4.00%–4.50% in 2026, implying persistent term premium at the long end [p.1][p.5]. Mortgage and longer-term rates are described as likely to remain elevated “as fiscal concerns weigh on the long end of the yield curve,” suggesting fiscal positions are a key factor preventing the long end from falling in line with short rates [p.11]. |
| RIC 2026 BAML | n.a. |
| Stifel Outlook | n.a. |
| TRowe Outlook | Large and persistent fiscal deficits in the U.S., UK, Germany, and France increase sovereign funding needs and bond supply, forcing higher yields to attract buyers and contributing to structurally higher longer‑maturity yields, particularly on U.S. Treasuries [p.11, p.18]. Germany’s very large fiscal expansion is expected to drive bund yields higher and “drag all eurozone yields up,” signaling upward pressure on term premia across the bloc [p.4]. Asset allocation guidance—“keep duration low: higher yields and steeper curves”—explicitly links funding requirements and deficits to a steepening curve and elevated long‑end rates [p.11, p.16]. |
| UBS Year Ahead | Financial repression—regulation and central bank balance sheets channeling savings into government bonds—is expected to anchor long-term yields below what high debt and issuance fundamentals alone would imply, compressing term premia despite structurally larger borrowing needs [p.36–38]. Failure to reassure on borrowing and inflation could trigger periodic spikes in long-end yields, as seen in episodes in the US, France, Japan, and the UK in 2025, with rapid increases flagged as a key risk to equity markets [p.47–48]. Medium-term forecasts see 10-year US Treasury yields drifting modestly lower (to ~3.75% by end‑2026) and similar small declines for Bunds and Gilts, consistent with subdued but positive term premia in a managed-yield regime [p.60]. |
| Source | Content |
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| Brookfield Outlook | n.a. |
| Goldman Outlook | US deficits are characterized as unusually large with debt near post‑war highs, while Europe shows divergence with Germany undertaking large but execution‑risky fiscal expansion and France facing market pressure with 10‑year OAT yields now matching Italy’s amid political fragmentation and deteriorating fiscal prospects [p.6], [p.9], [p.14]. Europe more broadly is shifting toward higher defense and infrastructure spending and greater protectionism, implying differentiated issuance and spread pressures versus other regions [p.19]. Japan and EM are covered via comparative 30‑year yield charts that place their long‑end moves alongside those of France, the UK, Germany and the US [p.13]. |
| Blackrock Outlook | U.S. sovereign risk is framed around post‑war‑high debt, high servicing costs and increased term premia driving an underweight in long‑term Treasuries [p.7][p.16]. Europe shows differentiated pressures: increased German issuance for fiscal stimulus is seen as largely priced, with a preference for non‑German sovereigns; the UK pursues consolidation to restore confidence but deferred cuts risk renewed gilt volatility [p.16]. Japan faces rate hikes, higher global term premia and heavy issuance that likely push JGB yields up (underweight), while EM sovereigns benefit from prudent fiscal/monetary policy, stronger balance sheets, a slew of rating upgrades and limited issuance, justifying overweight EM hard‑currency debt despite spreads near decade lows [p.14][p.16]. |
| Goldman Outlook - Summary | US is characterized by rising fiscal‑health uncertainty and a growing budget deficit that also contributed to a significant dollar depreciation. [p.5], [p.11] Europe shows a paradigm shift toward more expansionary fiscal policy—Germany’s easing of the debt brake and significant fiscal expansion versus political/fiscal frictions in France that may increase spread risk—whereas Japan combines looser fiscal policy with above‑target inflation and policy‑rate hikes pointing to normalization. [p.5], [p.14], [p.18] |
| Barclays Outlook | US is the most stretched among majors, with a ~7% of GDP deficit, $1trn interest bill, heavy refinancing and a $5.5trn five‑year funding gap, while eurozone debt is lower in aggregate but hides sharp differentiation between relatively sound Germany (large but manageable stimulus) and stressed France (debt >110% of GDP, gridlock and widening spreads) [p.5–6, p.9–10, p.20]. UK debt is high but slightly declining with a tighter fiscal stance, yet faces unique supply pressure from falling pension demand for gilts and a £30bn “black hole”, implying higher yields to clear issuance [p.11–12, p.20]. |
| HSBC Outlook | DMs (US, Europe, Japan) are characterised by moderate growth and high debt leading to rating downgrades and specific underweights (France on debt/election concerns, JGBs on debt sustainability), while many EMs see rating upgrades supported by better growth and responsible budgets and are consequently overweight in both bonds and equities [p.3, p.5]. Within Europe, France’s political and budget issues contrast with Italy and Spain’s healthier fiscal outlooks, and UK assets sit between the risks of too much tightening hurting growth and too little tightening raising borrowing costs [p.20]. EM countries such as Mexico and South Africa are highlighted for fiscal consolidation plans and inflation‑targeting frameworks that underpin sovereign credibility and lower yields [p.23]. |
| MS - 2026 US Equities Outlook - The Rolling Recovery Is Here | n.a. |
| JPAM Outlook | n.a. |
| KKR 2026 Outlook | U.S. is characterized by large but stabilizing 6–7% of GDP deficits and a 10‑year yield centered near 4–4.25%, with risks skewed to higher yields if fiscal slippage or trade tensions disrupt capital flows [p.61][p.65][p.77]. Euro Area has accommodative real policy rates near 0%, modestly higher Bund yields (3% in 2026–27), and country‑specific spread risk concentrated in France, whose 10‑year yields trade wider than Italy’s for the first time in 50 years [p.39][p.61][p.65–66]. Japan operates an intentional negative real rate regime with ultra‑long issuance funding AI/semis/energy/defense under Abe‑ism 2.0, while China combines low long‑end yields (~1.5%) with augmented deficits near 8.5% of GDP in a deflationary environment [p.50–51][p.61][p.66–67]. |
| JPM Outlook | U.S. is characterized by rising debt and inflation uncertainty, prompting a recommendation to diversify into other developed sovereign markets to mitigate U.S.-specific fiscal and inflation risks [p.5]. Europe, especially the eurozone, shows the strongest projected government investment growth in 2022–26 and large commitments to spend around 5% of GDP on defense and infrastructure starting in 2026, while Japan is expected to boost fiscal spending toward households and support reflation [p.9]. |
| RIC 2026 BAML | n.a. |
| Stifel Outlook | n.a. |
| TRowe Outlook | U.S., UK, Germany, and France are grouped as running expansionary fiscal policy with rising issuance needs and higher sovereign yields, whereas many EMs have brought inflation and debt under control and have reduced debt burdens over the last 10–20 years, making select EM nominal bonds relatively attractive [p.4, p.11]. Germany’s and France’s expansions raise eurozone‑wide yields and long‑run sustainability questions, while the UK faces political pressure for some consolidation but from still‑expansionary levels [p.4, p.11]. Japan is mentioned mainly in the context of inflation‑linked bonds rather than fiscal stress, implying less emphasis on near‑term issuance pressure there [p.11]. |
| UBS Year Ahead | The US faces persistent “twin deficits,” contributing to structural USD headwinds and episodes of higher yields tied to debt concerns [p.42, p.47]. The euro area combines rising public spending (e.g., Germany’s >20% of GDP infrastructure/defense plan) with bouts of yield pressure amid fiscal and political uncertainty (e.g., France) [p.27, p.58]. The UK is characterized by fiscal uncertainty that makes GBP sensitive but supported by relatively high yields, while Japan combines very high debt with ongoing fiscal stimulus and modest rate normalization, implying continued financial repression and potential yield/FX volatility [p.37, p.42, p.46–47, p.60]. Qualitative differentiation of fiscal risks and their impact on yields and FX is extensive. |
| Source | Content |
|---|---|
| Brookfield Outlook | n.a. |
| Goldman Outlook | Fiscal concerns at the long end are “heightened by an environment where central banks are no longer engaging in large‑scale bond purchases,” implying that the absence of QE makes markets more sensitive to fiscal and inflation risks and contributes to higher long‑end yields and term premia [p.13]. |
| Blackrock Outlook | n.a. |
| Goldman Outlook - Summary | n.a. |
| Barclays Outlook | Major central banks are close to ending balance‑sheet reductions, with the Fed set to halt QT and reinvest all maturing Treasuries and the BoE already slowing QT, potentially slowing further if market stability is threatened, thereby partially offsetting sovereign supply pressures [p.20]. The ECB’s Transmission Protection Instrument is highlighted as a potential backstop if spreads such as France–Germany widen “persistently and unsustainably,” and an “operation twist with a twist” in which central banks buy long maturities while treasuries issue shorter‑dated debt is floated as a possible response to supply‑driven stress [p.20]. These measures underscore a more active, sometimes reactive, central‑bank role in managing yield curves and mitigating term‑premium spikes tied to fiscal dynamics [p.20]. |
| HSBC Outlook | The end of the Fed’s QT in December, combined with stable US Treasury coupon supply, is expected to support longer‑dated USTs and help keep DM yields range‑bound [p.22]. In the UK, any Autumn Budget tax hikes could weaken growth and provoke a more dovish BoE stance, reinforcing the preference for neutral gilts but longer duration and for GBP IG credit with similar duration for carry [p.22]. |
| MS - 2026 US Equities Outlook - The Rolling Recovery Is Here | Early termination of QT, heavy reliance on the Standing Repo Facility, and readiness to provide liquidity are framed as mechanisms that support Treasury funding (especially via T‑bills) and “effectively help to monetize the debt,” reducing net duration supply and aiding long‑end yield containment. [p.11] These balance‑sheet and liquidity tools, alongside Treasury buybacks, are positioned as a coordinated yield‑curve management regime that facilitates financial repression by keeping borrowing costs below nominal GDP growth despite elevated inflation. [p.11–12, p.22] |
| JPAM Outlook | n.a. |
| KKR 2026 Outlook | Fed balance sheet is projected to stabilize around 22% of GDP, growing in line with nominal GDP after QT to support funding‑market functioning and temper long‑end volatility despite elevated issuance [p.65]. ECB has already removed €2.1tn of excess liquidity and is expected to continue modest normalization alongside a final hike to a 2.25% neutral depo rate, while BOJ is seen gradually lifting policy rates and JGB yields but maintaining a negative real rate “Goldilocks” environment through 2027 rather than aggressive YCC‑style repression or abrupt tightening [p.65–67]. |
| JPM Outlook | n.a. |
| RIC 2026 BAML | n.a. |
| Stifel Outlook | n.a. |
| TRowe Outlook | Central banks in developed markets are likely to lean somewhat looser than otherwise to support employment despite fiscal‑driven inflation risk, which reinforces the outlook for higher longer‑maturity yields rather than offsetting fiscal supply pressures [p.11]. The Fed is under unusually high political pressure, making it harder to return inflation to 2% and limiting scope for rate cuts in a context of large fiscal expansion and elevated debt, effectively amplifying rather than neutralizing supply‑driven term premia [p.3, p.11]. |
| UBS Year Ahead | Central bank balance sheets (Fed, ECB, BoJ) have expanded to multi‑trillion USD levels and are expected to remain high as tools of financial repression that help channel funds into sovereign bonds and suppress yields relative to debt fundamentals [p.37–38, Figure 19 p.38]. More frequent policy interventions are anticipated to “fix” borrowing costs—through balance-sheet use, regulation, and yield management—implying that interest rates and the yield curve will be increasingly policy-steered rather than purely market-determined [p.37–38]. |
| Source | Content |
|---|---|
| Brookfield Outlook | n.a. |
| Goldman Outlook | Government bonds have recently provided downside protection in episodes such as the regional banking crisis, weak labor data, and geopolitical stress, but the bond–risk asset correlation is described as regime‑dependent and can turn positive when inflation or fiscal concerns intensify, reducing hedging effectiveness [p.13]. Front‑end yields are viewed as retaining strong counter‑cyclical, defensive properties due to their sensitivity to central bank policy, while long‑end yields are less reliable as hedges because they are more exposed to fiscal and inflation shocks; investors are encouraged to use curve positioning to enhance portfolios’ defensive characteristics [p.13]. |
| Blackrock Outlook | Long‑term government bonds, especially U.S. Treasuries, are described as no longer offering the portfolio ballast they once did, leading to a tactical underweight in long‑dated Treasuries and a recommendation to find “plan B” hedges [p.7][p.8][p.15]. Investors are said to be hunting for alternative hedges such as gold (viewed as a tactical rather than long‑term hedge) and idiosyncratic exposures in private markets and hedge funds, reflecting impaired diversification benefits from sovereign duration [p.8][p.15]. The linkage between impaired hedging and fiscal/term‑premium dynamics is explicit, although detailed correlation statistics are not provided. |
| Goldman Outlook - Summary | Higher correlations between equities and fixed income and extreme equity concentration have made traditional 60/40 portfolios riskier, implying that long‑duration sovereign bonds now provide a weaker diversification and hedging function than in the past. [p.9] Bonds are still used for income and tactical balance, but the preferred approach is more active—using curve trades and diversified fixed income sectors rather than relying on passive long sovereign duration as the primary hedge. [p.9], [p.11], [p.14–15] |
| Barclays Outlook | Despite fiscal and supply risks, developed sovereign bonds are judged “broadly constructive” for 2026, with yields above 20‑year averages and expected lower policy rates and anaemic growth supporting their role as diversifiers [p.18–19]. Core rates are explicitly expected to be “a helpful diversifier from risk asset exposure in the event of a weaker economy,” and portfolios are kept at strategic allocation to developed government bonds, with a modest overweight to cash and short‑duration bonds and preference for higher‑quality/BBB–BB medium‑duration credit [p.21, p.45–46]. Concerns around supply‑driven long‑end volatility (US, France, UK) temper enthusiasm, but the hedge role of high‑quality sovereigns is maintained [p.20–21, p.46]. |
| HSBC Outlook | Assets have become more correlated, with equities, bonds and gold often moving together, reducing the diversification benefit of sovereign bonds [p.5]. A regime of sticky inflation has specifically challenged bonds’ ability to diversify stock portfolios, elevating the role of hedge funds and alternatives in portfolio construction [p.26]. EM LCD is mildly overweight partly because its correlation with risk assets has decreased while offering high real carry, enhancing its portfolio role relative to DM sovereigns [p.21–23]. |
| MS - 2026 US Equities Outlook - The Rolling Recovery Is Here | Long‑term fixed income is deemed “arguably the worst place to be” in this inflationary, run‑it‑hot regime, with bonds having been “weak performers” over the past five years and offering a structurally poor risk‑return trade‑off versus equities and real assets. [p.13] Bonds are portrayed as impaired hedges in scenarios like 2022 and their bear case, where rising yields drive equity multiple compression rather than providing diversification, while gold, crypto, and high‑quality stocks have functioned as superior hedges. [p.13, p.23] |
| JPAM Outlook | n.a. |
| KKR 2026 Outlook | Stocks and bonds are expected to remain positively correlated, as evidenced by a 24‑month rolling correlation that turned positive with higher CPI inflation and a forward correlation matrix showing U.S. government bonds positively correlated with major equity indices [p.12][p.17][p.79]. Traditional government bonds are described as less effective portfolio “shock absorbers” in this inflation regime, with bond yields more volatile and offering fewer hedging benefits, motivating a structural shift from 60/40 toward a 40/30/30 allocation emphasizing private equity, private credit, and real assets as diversifiers [p.11–12][p.65][p.75–76]. This weaker hedging role is framed as a central plank of the “Regime Change” thesis rather than a cyclical aberration [p.10][p.77–79]. |
| JPM Outlook | Sovereign bonds are viewed as effective ballast against recession in the current rate environment, with the caveat that stock/bond correlations are expected to remain positive outside recession, limiting hedging efficacy in normal or inflationary conditions [p.12]. Rising U.S. debt and inflation uncertainty reinforce the case for diversifying rate exposure across global sovereigns and into inflation-sensitive assets (e.g., TIPS, commodities, gold, private alts), and fixed income is framed as a source of income where active management manages a wide range of outcomes rather than relying on a single directional bet on rates [p.5][p.12]. |
| RIC 2026 BAML | Treasuries “remain contrarian and hedge against credit events,” despite very weak performance this decade (–3.2% annualized, –36% from the Covid peak) and a Bearish house view on government bonds [p.2, p.17]. Bonds are positioned as cyclical/credit hedges, while gold and cash are preferred as hedges against inflation/fiscal/regime risks, with gold called “the best hedge against anarchy and inflation” [p.17, p.18]. |
| Stifel Outlook | n.a. |
| TRowe Outlook | Elevated fiscal deficits and associated inflation risk reduce the appeal of long‑end nominal government bonds as hedges, with concerns that persistent inflation and fiscal deficits will keep upward pressure on long‑end Treasury yields, undermining their ballast role [p.11, p.18]. Inflation‑protected bonds in the U.S., some European countries, and Japan are highlighted as a cost‑effective way to hedge inflation risk, offering better portfolio protection than nominal sovereigns in this environment [p.11]. Asset allocation is underweight bonds overall, with low duration and overweight credit vs. governments, reflecting a view that traditional sovereign duration is a less effective diversifier than in the past [p.11, p.16]. |
| UBS Year Ahead | High-grade government and investment grade bonds are positioned as core sources of income and diversification, with medium-duration quality bonds expected to deliver mid-single-digit returns and to outperform cash particularly in adverse scenarios where falling rate expectations lift prices [p.39–40]. Scenario analysis shows 10‑year US IG bonds returning 7% in a “Disruption” bear case versus 3% in a tech boom, and strategic allocations to government bonds are highlighted as key hedges that historically reduced drawdowns versus pure equity portfolios, confirming their ballast role despite episodes when rapid yield spikes can temporarily impair hedging [p.39–40, p.49–50]. The qualitative link between lower-growth environments and bond rallies, and their volatility-dampening effect in 60/40 portfolios, is clearly described [p.39–40, p.50]. |
| Source | Content |
|---|---|
| Brookfield Outlook | Record sovereign debt levels and constrained public balance sheets are presented as key reasons why AI infrastructure (estimated at $7 trillion over the next decade) and over $100 trillion of infrastructure needs by 2040 must rely heavily on private capital, partnerships and privatizations rather than direct sovereign funding [pp.5–6, 9]. Energy and power system investments, including nuclear build‑out (e.g., a U.S. plan for 10 reactors and at least $80 billion of federal support), are similarly framed as requiring large-scale private capital alongside limited public resources [pp.12–15]. [p.?] |
| Goldman Outlook | Higher structural spending on defense and infrastructure is prominent, including Germany’s fiscal package that could raise spending by more than €80bn (1.8% of GDP) in 2026 and broader NATO/EU defense commitments such as a 5% of GDP defense spending goal by 2035 and an €800bn “ReArm Europe Plan 2030,” all of which support growth but tighten long‑run fiscal space through higher borrowing needs [p.9], [p.14], [p.45]. Climate transition and infrastructure are mentioned as additional structural spending pressures [p.6], [p.19]. |
| Blackrock Outlook | Elevated public debt and competing fiscal priorities—such as Germany’s defense push, stretched U.S. and UK deficits and Japan’s new spending pledges—are said to limit the public sector’s role in financing the AI buildout, shifting funding toward relatively less‑levered corporates [p.4][p.7]. In energy and infrastructure, elevated debt similarly constrains government spending so that private capital must bridge the gap between current energy supply and AI‑related demand; NATO allies’ 5%‑of‑GDP 2035 defense target underscores rising fiscal pressures from rearmament [p.9][p.10]. AI‑driven productivity could eventually ease public debt burdens, but this is seen as a longer‑term, uncertain offset to today’s constrained fiscal space [p.7]. |
| Goldman Outlook - Summary | Increased fiscal flexibility in Europe, including Germany’s easing of the debt brake for defense and infrastructure, is expected to support reindustrialization and help narrow the growth gap with the US, indicating political willingness and space to fund these priorities. [p.5] In the US, increased government spending and AI‑related capex are weighed alongside rising fiscal‑health uncertainty, suggesting that while funding is flowing into AI and public programs, the trajectory of deficits is becoming a constraint to monitor rather than an immediate binding limit. [p.11], [p.17–18] |
| Barclays Outlook | Fiscal space is discussed mainly through Germany’s multi‑year stimulus of about 2.2% of GDP by 2027, including a €500bn infrastructure modernisation package to 2037 (with roughly a fifth expected in 2026), and a rule that exempts defence spending above 1% of GDP from deficit calculations, effectively loosening constraints on rearmament‑related outlays [p.9]. |
| HSBC Outlook | n.a. |
| MS - 2026 US Equities Outlook - The Rolling Recovery Is Here | n.a. |
| JPAM Outlook | n.a. |
| KKR 2026 Outlook | Japan explicitly channels fiscal deficits and ultra‑long‑dated JGB issuance, underpinned by persistently negative real rates, to fund “Abe‑ism 2.0” priorities including AI, semiconductors, clean energy, digital infrastructure, and defense, supported by a JPY 17.7tn (2.8% of GDP) supplementary package [p.51][p.66–67]. U.S. growth is described as increasingly dependent on government deficits and AI‑related capex cycles, though fiscal space is not tightly quantified at the program level [p.13]. Euro Area and China discussions emphasize macro stance more than explicit fiscal capacity for these thematic investments. |
| JPM Outlook | Fiscal expansion is highlighted via stronger government investment and explicit European pledges to spend about 5% of GDP on defense and infrastructure beginning around 2026, indicating growing fiscal space or willingness for rearmament and infrastructure build-out [p.9]. |
| RIC 2026 BAML | n.a. |
| Stifel Outlook | n.a. |
| TRowe Outlook | U.S. fiscal expansion linked to AI‑related capital expenditure incentives and the OBBBA is projected to raise fiscal spending by an amount equal to 23% of current GDP over 10 years, suggesting substantial fiscal space being used to support AI and associated infrastructure but at the cost of higher debt and inflation risk [p.3]. Germany’s very large fiscal expansion is framed around broad fiscal loosening (including infrastructure and green transitions indirectly) that increases bund yields, though specific references to defense or energy are limited [p.3–4]. |
| UBS Year Ahead | Rising defense and infrastructure spending—such as Germany’s plan to invest over 20% of GDP in infrastructure and defense—is identified as a key driver of higher public debt and deficits, indicating that fiscal space for such priorities is being used rather than consolidated [p.27, p.36]. AI is discussed primarily as a growth and market driver with scenario implications for rates and bond returns [p.39, p.47–48]. |
| Source | Content |
|---|---|
| Brookfield Outlook | n.a. |
| Goldman Outlook | The interaction of US tax cuts and tariffs is highlighted, with the OBBBA tax cuts estimated to add about $3.4tn to the deficit over 2025‑2034 but largely offset near term by tariff revenues, leaving the fiscal deficit “little changed to modestly lower” in the short term even as longer‑term deficit pressures increase [p.9]. Demographic‑driven healthcare and pension spending are cited as structural fiscal pressures, and higher effective US tariffs (18%, the highest since 1934) are framed as both a revenue source and part of a broader protectionist shift that affects fiscal and supply dynamics [p.6], [p.9]. |
| Blackrock Outlook | A more leveraged financial system is portrayed as increasingly vulnerable to bond‑yield spikes from fiscal concerns or policy tensions, with indebted governments having less capacity to cushion such shocks, raising overall financial‑stability risk [p.7]. Private‑sector leverage is expected to rise to fund the AI buildout, layering additional vulnerabilities on top of high public debt [p.4][p.7]. |
| Goldman Outlook - Summary | US policy uncertainty around tariffs and spending is linked to both a significant depreciation of the dollar and rising budget deficits, creating FX risks for non‑USD investors and indirectly shaping global demand for US Treasuries. [p.5], [p.11] Competitive pressure from Chinese exporters and rare‑earth controls is flagged as a headwind to European manufacturing alongside German fiscal expansion and French political/fiscal tensions, with potential implications for sovereign risk premia. [p.18] |
| Barclays Outlook | US “reciprocal tariffs” generating close to $300bn annually are flagged as at risk of being ruled illegal, potentially forcing compensating tax/spending changes that would alter fiscal balances and market volatility; alternative import duty mechanisms are expected to be more distortionary and uncertainty‑inducing [p.6]. UK pension reforms are expected to “structurally reduce demand for gilts,” requiring more price‑sensitive buyers and higher risk premia, a key non‑deficit driver of sovereign supply/demand dynamics [p.20]. Broader themes include concerns about Fed independence, policy uncertainty around midterms, and the need for more harmonised monetary‑fiscal policy in a high‑debt environment [p.4–6, p.19–20]. |
| HSBC Outlook | n.a. |
| MS - 2026 US Equities Outlook - The Rolling Recovery Is Here | Tariffs and a deliberately weaker currency are highlighted as key tools to address the –4.4% of GDP current account deficit and “hollowed out” sectors, linking trade policy and FX to the broader fiscal/external adjustment and inflation strategy. [p.9] References to stablecoin issuance as a potential funding or yield‑management innovation and to massive private‑market dry powder (~$4.2 trillion, or ~$8 trillion with leverage) point to evolving non‑traditional demand/supply channels for sovereign and quasi‑sovereign risk. [p.22, p.57] |
| JPAM Outlook | n.a. |
| KKR 2026 Outlook | U.S. fiscal projections incorporate Trump’s “One Big Beautiful Bill Act” with tax changes and tariffs, where incremental spending, tariff revenue, and higher debt service collectively keep the deficit in the 6–6.6% of GDP range through 2029, and tariffs/trade tensions are flagged as potential catalysts for capital‑flow disruptions and higher term premia [p.65][p.77]. Eurozone ETS2 carbon pricing, delayed to 2028, could add 40–70bps to inflation when implemented, indirectly affecting real debt service and rate policy [p.41]. |
| JPM Outlook | n.a. |
| RIC 2026 BAML | Corporate bond supply is highlighted via heavier IG issuance and substantial AI‑driven issuance from hyperscalers, with spreads expected to stay in an 80–100 bps range and investors advised to “clip the highest coupon” in the 3–10yr belly despite heavier supply [p.8, p.17]. Elevated deficits and heterodox policy are linked to strong central‑bank gold buying (~8,100 tons added since 2004 and ~830 tons expected in 2025), reinforcing gold as a beneficiary of fiscal and policy trends rather than bonds [p.10]. |
| Stifel Outlook | A quantified “Quarterly Fiscal Impulse / Drag as % of GDP” chart highlights near‑term U.S. fiscal stimulus from a 2025 tax cut (“One Big Beautiful Bill Act”) that is expected to support GDP and equities even with tariffs, and a long‑cycle commodity/populism framework links government deficits and conflict to a regime that is structurally less friendly to high Growth equity valuations. [p.5, p.38, p.41–42] |
| TRowe Outlook | U.S. policy mix including tariffs and immigration restrictions is characterized as inflationary alongside fiscal expansion, adding to the need for higher yields and complicating monetary control of inflation [p.3]. Select EM local markets (e.g., Czech Republic, Thailand, Brazil, Chile) benefit from comparatively better debt dynamics and controlled inflation, offering alternative sovereign supply/demand profiles versus DM and supporting overweight EM positioning [p.4, p.11]. |
| UBS Year Ahead | Trade tensions, tariffs, and export controls (e.g., on AI chips or rare earths) are highlighted as risks that could reignite inflation and constrain central banks’ ability to cut rates, indirectly affecting sovereign funding costs and required bond supply [p.47]. The financial repression regime explicitly relies on regulation steering institutional savings (banks, pensions, insurers) into government bonds, implying structurally elevated captive demand for sovereign debt [p.36–37]. |
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