Fixed Income Webinars

Hello, and thank you for joining us for T. Rowe Price's bi-annual Fixed Income Roundtable, "Ahead of the Curve." In this roundtable, entitled "The Impact of High Sovereign Debt on Bond Markets," we'll take a deep dive into the wider implications of sovereign debt levels for bond markets, governments, and the fixed income investor as we witness nation states battle to keep their growth agendas whilst maintaining affordable yields to service ever higher levels of debt.

My name is Amanda Stitt. I'm an investment specialist covering Fixed Income, and I'm delighted to be your host today.

Now, before we begin, we wanted to offer a few tips to help you navigate the console for today's webinar. Please feel free to submit questions to us throughout the webinar via the Q&A box on the left side of your screen. We'll do our best to answer them as soon as we can. We greatly appreciate your feedback as we seek to improve the quality of our program.

If you do experience any issues during the webinar, please first try to refresh your browser. If the problem persists, click the help icon at the bottom of your screen for more specific troubleshooting instructions.Lastly, some recent relevant articles can be found in the resource list under the Media Player.So, with that out of the way, I am delighted to be joined in the studio today by Arif Hussain, Chief Investment Officer and Head of Global Fixed Income, and Ken Orchard, Portfolio Manager and Head of International Fixed Income. Welcome, Ken and Arif.

Thanks, Amanda. Thanks for having us again.

Hi, Amanda. I am also joined by our Baltimore studio by Blerina Uruci, Chief US Economist in the Fixed Income division, and Samy Muaddi, Head of Emerging Markets Fixed Income.

Welcome, Blerina and Samy.

Hi, it's great to be here.

Thanks for including me.

So today we're discussing the impact of high sovereign debt on bond markets and the far-reaching consequences of state indebtedness. Over the past few months, we've seen a lot of alarming headlines detailing the unsustainable path that the US is continuing down when it comes to debt levels, with a suggestion that if things don't change, we'll reach a point where the market response may be violent. So I thought I'd start with you, Blerina. In your mind, how severe is the current debt trajectory, and is that something that we should be worried about?Amanda, let's start with some numbers. Let's look at where we are in terms of fiscal deficits and debt-to-GDP levels.

For the US, we're currently running a debt-to-GDP level of about 120%. This compares to 107% just before the pandemic in 2019, and about 60% back in 2004. So what we've seen over the last two decades is essentially a doubling of the debt-to-GDP level for the US economy. At the same time, we're running deficits of about six and a half to seven percent for about four or five years now. Of that deficit, we're spending three percent of GDP on interest costs, such that the debt servicing cost is almost half of the annual deficit and fiscal deficit for the US economy.

Now, as far as I'm concerned, when I look at the debt-to-GDP ratio of 120%, the good news is that there is no empirical evidence out there to suggest that this kind of debt is unsustainable for an economy as diversified and dynamic as the US, and that has reserve currency status in the global financial markets, as well as deep and liquid markets.

So I'm not, per se, concerned about the debt level of the US economy, but what concerns me is the sustained high deficits that we've been running. When I look at the deficit number, I like to split it between the primary balance and the interest servicing part of the deficit. The primary balance is three and a half to four percent of GDP.

Now, when you run time series analysis with the unemployment rate, we typically run these primary balances when the unemployment rate is eight percent in the US economy. Right now, we have an economy at full employment, with the unemployment rate at historic lows of four percent. So it makes sense in a recession with eight percent unemployment to run a large primary deficit, because the automatic stabilisers kick in, and you are bringing in less revenues because growth is lower. You're also paying more in unemployment insurance because you have more workers that are out of work. Right now, with a full employment economy, this kind of primary balance is large, and so there needs to be some policy addressing it.The other thing that concerns me is that we're spending a lot—three percent of GDP—servicing the debt because interest rates are high, and also because the deficit and debt levels are high. That means there is an opportunity cost: money that we're spending on servicing debt, we're not spending on investing in the economy, in the workforce, in healthcare, and so on.

So just to sum up, there's no evidence to suggest that the level of debt is unsustainable for an economy like the US. But I think the trajectory of the fiscal deficits is quite concerning to me.If you as an investor, though—or Blerina, it doesn't sound like she's too concerned at this stage, given the magnitude and all the numbers we've quoted there—but as an investor, is that something that you worry about?I'm petrified. With the utmost respect to Blerina and anyone looking at any individual country, I think the issue is this is a global problem. The US is running high deficits. The UK, France, Italy, Japan—everyone is issuing debt, and ultimately that debt needs to find a home. Ultimately, we're in an arms race; to clear it, yields have to go up, and where that settles to sell all of this debt and find it a home in the asset allocation, that's what worries me.

Blerina, you said that the trajectory or the budget is something potentially that you are concerned with. Is the solution here that we need some degree of austerity in the program at some point in the future? Are you seeing any of that?

So I think the US historically has reduced its deficit through a number of ways: through growing at a faster rate, through some kind of austerity, or through opportunistically higher inflation. We can get into this later, but that's not a sustainable way to bring down debt or deficits. So what am I seeing in the political landscape in the US over the last decades is an unwillingness to deal with the deficit through austerity.We're spending a lot of time and ink talking about the trajectory of debt and deficit, but when it comes to policy, on the one side, we'll have fiscal packages that are increasing spending without tax offsets. The Biden administration's period of a lot of fiscal largesse is a good illustration of this. Or, on the Republican side, we're having tax cuts—such as the Trump TCJA bill or the "one big beautiful bill." Both are illustrations of how we're reducing taxation but not with enough offsets on the spending side. So both approaches are leading to larger, not smaller, deficits. So I'm not seeing anything in the political landscape to suggest that austerity is imminent. I think this is probably what's concerning investors like Arif that are looking at this at a global stage, not just the US.

Looking at the buyers of debt at the moment, we've come through a period where central banks have been great buyers of debt, and that was great because they weren't price sensitive. Are we seeing a change in who are the marginal buyers of debt? Is that something that could actually be pushing yields up?Yes, and I think this is a very underappreciated aspect of the government debt problem in the world today because, as you alluded to, for many years there were significant price-insensitive buyers of government debt. There were buyers that bought no matter what the interest rate was. Their demand varied very little depending on the price. But that's changed. Now, if you look at the US, for example, ten years ago, the foreign official sector—so these are foreign central banks, sovereign wealth funds, and the like—owned about one third of the US Treasury market. Today it's down to fourteen percent, and they're probably not coming back anytime soon.You mentioned other central banks buying. We have the Fed buying US Treasury debt during Covid. We have the ECB and the Bank of Japan also buying their own government debt. Now, most of these central banks are running down their holdings of government debt. They're not buying anymore because inflation is high, and they don't need to do this anymore to stimulate monetary policy.

Another aspect: change in the private sector. We're seeing a gradual decline of defined benefit pension plans around the world because of aging populations and the rise of defined contribution plans. This has big impacts for some governments in particular. Look at the UK—if you go back twenty years, insurance companies and pension funds in the UK owned about two thirds of the gilt market. Today that's about twenty-two percent. So this big change that's taking place means that new buyers have to come in. Now these are households, they're banks, they're asset managers such as ourselves. But we're much more price sensitive. We're not going to buy government bonds just because we have to; we buy them because we think they're offering attractive return.That means higher yields. At what point do you think these new marginal buyers are going to stop and say, "Look, this is a problem. We're going to penalise you for your debt levels." And obviously, the way that they'll penalise them is either through a buyer's strike or higher yields. Is there a magic number here? We're always looking for magic numbers and we never get them.

Yeah, there's no magic number. There's no magic date. But I think you can make a strong argument that we're already seeing the market imposing some discipline on some governments. Look at the UK, for example. We're seeing the highest bond yields that we've had in twenty-five or thirty years. The UK government is now actively looking at ways that they can tighten fiscal policy—tax rises, for example. I think that a chunk of that is due to the fact that they're seeing interest costs going up. The market is giving signals to France as well, with French spreads widening out. In France, not all the politicians are listening, however. I think for other countries it's going to be much more gradual. We're going to see this play out over a longer time period—maybe five years or maybe ten years—because the politicians don't want to take the big steps necessary in order to really get a handle on the problem.

So it's going to be back and forth between the markets and the government until we finally get a solution to this. I don't know when that's going to be, but it's going to take a while.Could we say sort of this year, so 2025, we have seen yield curves steepen not only in the US but in multiple countries around the world. Arif, in your opinion, is that yield curve steepening to some extent the market saying, "Hang on, we're looking at your long-term debt projections here"?I think the curve steepening is a little bit to do with that. Now, as bond people, we spend a lot of time looking at the yield curve, but to the point Ken just made—the price for mobilising savings into the bond market—I think we have to divorce ourselves from two-, five-, ten-, thirty-year curves and just think about what is the opportunity cost for broad savers in the economy to come out and buy the national debt. Ultimately, that's from cash or potentially from equities. So the return or the yield promised by government debt has to be substantially above cash to make that trade, make that allocation, or the potential return going forward needs to be a lot more attractive than other assets like equities.

So I think some of the yield curve steepening is certainly to do with that. Some of it has to do with falling inflation. Some of it has to do with central bank expectations. But I don't think it's enough. I think the curve will have to be a lot steeper over time—certainly relative to cash yields—to get people to mobilise their cash and put it into government bonds.

Potentially a politically sensitive question, particularly in today's market: if we do see yields go up a lot, and I'm going to ask Peter Rainer this question, is there any way that central banks become the solution here?Thank you for this question. I would say we've had examples. Let's take a pause and step back for a moment. The Fed will always tell you fiscal policy is taken as given; the trajectory of the debt, that's the Treasury's remit. They focus on price stability and full employment—those are their two mandates. But the examples we've had from central banks, including the Fed, is that in times of market stress, they won't hesitate to use the balance sheet in order to stabilise markets. They wouldn't hesitate to step in and buy if yields in the Treasury market here in the US were basically becoming dysfunctional and you had consecutive days of very large moves in yields. The Bank of England is an example of this. They did that successfully, then managed to pull out of doing QE temporarily for market functioning reasons. So I think the Fed could use that.

Now, the big question mark is: would they overstay their welcome? Would they stop short, start QE and then keep going because they might be worried about a taper tantrum-type event, or because, as we're seeing increasingly, the Fed might be becoming a more politicised institution? And the vision of this administration might be that, together with the Treasury, they need to play a bigger role in keeping yields in the US lower and putting the debt on a more sustainable trajectory. I think this should be the question mark for investors in 2026 and 2027. What is the vision of this administration for the Fed, and how does it work with Treasury to control or affect Treasury yields here in the US?

I think when we think historically of markets that have probably the most experience with problems with debt or debt sustainability issues—I'm going to ask you this question, Samy—it's emerging markets. We think traditionally they're the ones that have had the problem. Can we at any point say that we can use their experience as a roadmap for what could potentially happen in G7 countries?Sure, I'm used to people coming to me with their problems. As an emerging markets specialist, one early career experience—this is fifteen to twenty years ago—that sticks out for me is when T. Rowe Price sent me to the capitals of Dublin, Madrid, and Athens to research the Eurozone financial crisis. I did that with Ken, actually, back in the day, and what we needed to do was a synergy of recognising that these constructs and borders are somewhat artificial. Sovereign risk is sovereign risk. Some countries have more degrees of freedom than others, but we needed a consistent framework to analyse those. As Ken articulated, we've now traveled uphill in quality, if I could use that metaphor, and we've now looked at France and the UK as having government bond markets that aren't behaving in a classical way. So it's natural for us to now go to the United States as the next port of call on this.

What I would say in my twenty years' experience on this specific topic: there's a very clear differentiator between a developed market and an emerging market. In a developed market, when something goes wrong, bond yields go down. It's an automatic stabiliser for a developed market; it's easier to finance the problem—the classical Keynesian response. In an emerging market, when something goes wrong, bond yields go up. It's pro-cyclical; it's more expensive for the government to support itself. I think that's what makes some of the behavior in the UK and French market in the last two years concerning.

The lasting legacy for me of "Liberation Day"—to me, the fallout from that, I believe the president used the technical term "queasy." The bond market was feeling queasy, and that risk was selling off. Asset prices were going down before yields were going up—forty basis points or more, if I recall. So we need to get that topic under control, because I think that's the governor for where we end up here.Some signposts that I would look for as an emerging market investor who's gone through this many times: first would be the operational independence of the Federal Reserve. I think we often talk about independence, but I would separate political independence from operational independence. I think the latter is the one that we should focus mostly on from here.

Second would be if we begin to see higher quality US corporate bonds trade through US Treasuries—I'm talking only about the highest quality part of the market, investment grade and cash flow-rich companies. I've seen it plenty of times in emerging markets where those companies trade through the sovereign curve.And third, I would look for, as the Federal Reserve cuts interest rates and hedge ratios, hedging becomes cheaper for dollar hedge ratios to go up. How far that goes versus history—if that behavior becomes more than anticipated, that could be another sign of this waning exorbitant privilege in the United States.

You mentioned a topic that I wanted to move on, and I wanted to address this question to you, Ken. We've talked about the implications on yields. What about the dollar? So if, again, in a debt sustainability problem—and I said it's not necessarily there yet—but in a debt sustainability problem, where is the dollar going?Yeah, that's a really tough one, Amanda. Economic theory tells us that, you know, debt levels on their own shouldn't have any real implications for a currency. What really matters is relative fiscal and monetary policy mix. What we've seen over the last year or so is that in the US we've got some neutral monetary policy and relatively loose fiscal policy. That's more or less kept the dollar somewhat stable, although with some ups and downs. I think the big question for the dollar is going to be what happens if the Federal Reserve loosens monetary policy a lot from here—they cut interest rates dramatically—or even worse, if we embark on doing QE, buying a lot of Treasuries. Well, then, you know, that would be running loose fiscal and loose monetary policy at the same time. I suspect that would be very detrimental for the dollar, and we could see the dollar depreciate quite significantly, particularly if inflation is still not necessarily solved—which is the question I wanted to actually ask Blerina. I mean, we're talking about an environment in the US where we can't necessarily say inflation is over, we've solved that problem. We've potentially got a debt sustainability issue; what is the implication on inflation?

This is very important, these questions. Let's talk a little bit about inflation numbers. We've been above target here in the US since 2021, and we've made great progress from the peak in inflation that was reached in 2022. But no matter how you dice and slice inflation, it's been sticky—it's around three percent. The Fed likes to look at core PCE and it likes to look at annual inflation over the last twelve months, and also momentum—what is it doing on a three-month, six-month annualised rate? Those are all at three percent. It's because services inflation, even outside of rent and shelter, has been sticky, and also because goods deflation has stopped and goods prices are actually accelerating recently. So yes, inflation is sticky; it's not back down to two percent. Now, how does monetary policy that might be slightly restrictive or not interact with very loose fiscal policy? We're running these deficits; they're stimulating demand—six or seven percent of GDP deficits at a time of full employment. Let's emphasise full employment here. So I think fiscal largesse increases upside risks to inflation and makes the job harder for the Fed to bring inflation back down to two percent. And then for us as investors, this kind of interaction between monetary and fiscal policy increases uncertainty around future inflation. It should increase inflation risk premia, and this should be reflected in breakevens and higher yields for TIPS inflation-linked bonds here in the US. This can become a negative feedback loop because higher inflation expectations breed higher inflation, because consumers and workers will want to have higher compensation in the future. Those higher wage pressures keep the cost in the economy higher. So I think this is a vicious circle that we don't want to get into, but that's the risk for the US this year and next.

Traditionally, some suggest that the only way that you get rid of your debt is essentially to inflate it away. It sounds like that's off the cards here.

I don't think that's a sustainable solution.

I think Samy can talk to this from an EM perspective, because there are plenty of examples. There are not so many in DMs, but you can opportunistically benefit from higher inflation and lower the debt-to-GDP ratio. Nominal GDP will rise really fast, and for a year or two, it looks great—the debt-to-GDP ratio can be on a downward trajectory. But beyond that one-to-two-year horizon, then you're looking at higher interest rates because the central bank needs to react to higher inflation, and that's going to increase your debt servicing cost, which in the US is three percent of GDP—already quite high. Normally, when you're tightening monetary policy, growth is slowing, unemployment is increasing. We didn't have that so far in this business cycle, but that's what happens traditionally. Lower growth means lower tax revenues—that's not helping your deficit. Higher unemployment means automatic stabilisers kick in and increase expenditure—again, that's not helping the deficit in this scenario. Maybe you have a central bank that does not increase interest rates as much as needed in a high inflation period. Well, that's just going to lead to more hyperinflation. We have a large proportion of debt here in the US that is also linked to inflation, so that's going to start kicking in as well.

But I want Samy to chime in on the experience of inflating debt away.

Sure, I can do that next. There are a number of lessons of history that we can apply here. I just want to underscore we've done this before in the last two hundred years. This will be the fourth time that we've gone through a cycle like this. Let's first summarise: there's only three ways to reduce debt at the end of the day, and the sum of those probabilities must be one hundred percent. So there's only three ways to do this.The first way is to run a primary surplus over time. The second way is through the interest-to-growth differential—that blurring I talked about. Nominal growth or inflation is one way to do that. But the interest-to-growth differential is kind of the key algorithm to solve for. The third, which we'll put to the side, is default or restructuring. Classically, G10 countries in the last two hundred years have not gone through restructuring, so we'll focus on the first two.

Pre-World War I, the deleveraging that happened was done almost exclusively through running primary surpluses. The interest-to-growth differential actually added to debt in that period. Post-World War I and post-World War II, we had two other periods of deleveraging and it was much more balanced. You had a contribution both from the interest-to-growth differential but also from running a more prudent primary balance after the war subsided.So here we are today. This is the fourth time we're going to go through this—probably towards the end of my career, maybe, is when the story finishes. I would argue it's probably politically unacceptable in the foreseeable future to be running a primary balance. I'd love to be challenged on that. But it feels bipartisan that at full employment, we're running loose fiscal. It would be quite the adjustment to political expectations to be running a primary balance here.

So then we go to this interest-to-growth differential. What I would challenge is if you have an investment policy statement that assumes a two percent inflation rate, maybe we need to test that assumption. We may look back at history of a two percent inflation rate assumption in an investment policy statement as somewhat of an anachronism. Maybe that number needs to be higher, which kind of gets us to where our terminal bond yields could go. I don't think that's necessarily the worst outcome. Again, going through emerging markets, we could open door one or door three and look at some other ways to do this. That might be the most tolerable politically way to do this.

The last thing I'd say is it's a luxury to maybe even have that option in a developed market. In an emerging market, the timelines become much more compressed. You don't get to pick when you do the adjustment, and you actually have to do the adjustment. Almost always, the emerging market countries have to do the primary balance side.

Earlier, Ken and Arif, you mentioned that clearly this debt issue is not a US-alone issue. It's a lot of developed markets that are experiencing the same thing. But I want to suggest that maybe different markets have different challenges. Is the situation in Japan, the UK, France—have they got differences in how the market is structured versus the US that is either in their favor or not? Both opinions are very welcome.I would still roughly classify countries into those with very high debt levels and those with very large deficits. There are some countries with very high debt levels, but in fact their deficits are not too bad, so their overall debt profile is stable. Japan and Italy are two examples there. Italy actually ran a primary surplus last year. It's likely going to run a primary surplus this year. So despite the fact that debt is very high, it's fairly stable.

Contrast that with countries like France, somewhat the UK, and the US, where debt levels themselves aren't so high, but the budget deficits are rather high. So we're seeing quite rapid increases.Another important difference is to look at the extent to which governments are able to capture their domestic savings. There are some countries, such as Japan, where you've got very large domestic savings bases, and a lot of that is being held onshore—a lot of it ends up getting invested in government bonds one way or another.I think there's a challenge at the moment, though, with domestic buyers being on strike, but they've got the spending power to go there. Other countries, such as the UK and France, and the US is increasingly in this category, are, to use a phrase that Mark Carney used when he was the governor of the BOE, "reliant on the kindness of strangers," meaning you are effectively reliant on foreigners to come in and purchase your debt. So those governments are definitely in a weaker position than others.

Going back to what you were saying in Japan, yes, that is true. We are seeing some of that change at the margin. It seems more and more foreigners are the marginal buyer of JGBs, particularly at the long end. We're seeing this in the twenty-year sector and out, and that has led to a very steep yield curve in that place. So Japan is being forced to be more of a price taker on its government bonds at the long end than a price maker.I'm not going to test this assertion across every country, but government bond markets are an ugly block at the moment. I think the key here is to find the best houses on this ugly block. The countries that are going to look a little bit better are the ones that can mobilise big pools of domestic savings—Japan's buyers may be on strike at the moment, but they've got the spending power to go there. The second factor goes to something Blerina talked about, which is the central bank's willingness to maybe move the volatility in bond markets a little bit. So it doesn't have to be going back to quantitative easing—they can potentially just do less quantitative tightening. The UK is the poster child at the moment for bad bond markets, but it would be very easy for the Bank of England to slow down quantitative tightening, and that may calm things down a little bit.

Sticking with the UK, another example for the primary balance issue: we're not getting that, but if you have a government willing to actually do the right thing—the UK is likely, when the budget comes around, to raise taxes and address the problem. There's very little political willingness around the world to raise taxes. The UK is one place, so maybe, counter to all the bad press that the UK gets, it has got the domestic savings, a central bank that can help, and a government who might do something in the right direction. Those are the sort of criteria I'm looking at. Again, it's an ugly competition and you're looking for the least ugly in this case. There may be opportunities in global bond markets to find some outperformance.

I was going to say, UK gilts—thirty years—are trading at levels that they haven't had in a very long time, getting a lot of column inches and attention. Again, there are actions that people can take. They just need to go and do them—it's about willingness as opposed to ability.

Switching gears a little bit, I wanted to talk about portfolio construction. For investors who diversify their portfolios, whether within fixed income and equities, US Treasuries are probably the poster child of portfolio construction—traditionally used as the risk-off asset diversifier. Is that how we can look at them going forward? Ken, as a portfolio manager?

Yeah, it's unclear. I think Amanda raised a lot of questions. Blerina said earlier that US Treasuries are a very liquid market. The Fed's always going to make sure that the Treasury market is working and functioning properly. I think we can rely on that—treasuries are the most liquid bond market in the world, and they're going to remain that way. What is less clear is the other part of being a risk-off asset that we typically associate—that you can earn a lot of capital gains when times are bad. Traditionally, in a risk-off episode, US Treasuries rally, the dollar goes up, and so not only do you have a liquid asset, but you also have an asset that appreciates in value. I think that's really going to depend in future, first of all, on where you are on the yield curve. If you're on the very front end of the yield curve and the Federal Reserve is cutting rates, well, then perhaps you can still have some capital gains. Further out, it's quite possible that the longer end is not going to rally in a risk-off environment, particularly if the market is still concerned about inflation and other issues. So you may not get those capital gains in holding a ten-year Treasury.

I think it also depends—are you a US dollar-based investor or a foreign currency investor? If you're a foreign currency investor, then it's quite possible the dollar's not going to appreciate. We saw in April that, in fact, it went the other way. If you're holding Treasuries unhedged on the basis that when bad things happen in the world, those are going to be helpful, you should start to be thinking about alternatives.To add to that story, if you look at the actual volatility of G7 countries, most of the developed market volatility in the 2024 and 2025 periods was much higher than emerging markets. So my question—I'm going to ask this to Samy—can emerging markets be the new diversifier or risk-off asset in your diversified portfolio?I'm not going to be that optimistic on this, right? The key phrase, if you walk away from anything, is for most clients this is true: your portfolio construction is such that it's not adapted to the new reality that Treasury volatility has converged with the volatility of other assets. That means you own probably a lot more Treasuries than you should, and a lot more Treasuries relative to other safe assets. There are many other safe assets you could own—Asia duration, global corporates, even short duration double Bs. To be clear, I'm not saying those are safer than Treasuries; Treasuries are still sort of your gold standard in the market. But the volatility convergence that we've witnessed and seems to be more durable—most asset allocation platforms have not adjusted to that reality and therefore are overexposed to that asset, particularly as Ken highlighted in the moments when you need it—in those moments like April, the left-tail risks that we're trying to control for, why we own those assets to begin with in our portfolios.

Would you suggest this sort of volatility convergence—some of the reason that has happened is the deterioration of G7 debt sustainability and the improvement of emerging markets?

I think it's more that we're entering our fifth year of being above the inflation target in the United States. I think that's the core thing. Certainly, I can articulate a thesis as to fiscal quality convergence between, say, at least the developed Asia parts of the market and the United States, but I think most of it is just the fact that we're now entering a fifth year above inflation target, and therefore volatility will follow. The market is a cold, cruel reality and a live measure of the results that policymakers put out into the paper that investors own.Picking up on something Samy said, I think one of the reasons why people haven't readjusted their portfolios to the reality of Treasury volatility is they're looking at some of the assets that Samy's talked about—high-quality global IG credit instruments—and they're comparing the yield on those to the Treasury and saying spreads are really skinny, there's no value in going and buying those, but because the risk-free asset yield is going up. But maybe, on a quality-adjusted basis, those spreads aren't that skinny. So I think this isn't just a government debt discussion—this has implications through credit investing and across the whole of the asset class, the asset allocation. It was mentioned earlier that some high-quality credits are trading through governments—is that going to become more common?

Samy mentioned that. I think we've seen it occasionally in some markets—in emerging markets, we've seen it in Italy, for example. I'm a bit skeptical that we will see particularly longer-dated corporates trading through high-quality developed market governments. At the end of the day, developed market governments have the power to tax and the power to regulate, and that is something a corporation doesn't have, so that should give them some credit enhancement.

That said, it doesn't mean that spreads can't get a lot tighter than they are today. We saw back in the 1990s that spreads on the US investment grade corporate index got down into the mid-50s—a good 25 basis points tighter than we are today. Certainly at the very front end, at the very short end of the curve, where you don't have that sort of a maturity—that duration risk—it's possible that we could see some high-quality entities trade through the US government. For example, today, would you rather have a two-year World Bank bond or a two-year US Treasury bond? Which do you think is probably the safer asset today? I think that's an open question. So yeah, those could probably trade through.

We're running out of time, so I just wanted to ask one last question to everyone, and I like to do these things where we ask current questions—how you're positioning portfolios or how do you react to something. So let's assume, Arif, your prediction on US Treasuries comes true, and you're on record for saying ten years going to six percent at some point in time. If that happens now, how do you—and I know it depends on how quickly it happens—but if that happens now and reasonably quickly, how do you make money in fixed income?Ken, first.

Well, some of the things that we've talked about today—Samy mentioned Asia duration, short-dated corporates. I would also say some very short-dated securitised credit. I think that package is going to do very well for you in that situation.

Arif?

I think the real money is to be made if and when that happens, because that will be the shot that creates the action, creates the reaction from savers, from governments, from central banks. At that point, the bond market becomes extremely attractive, and that's your buying opportunity.

Samy?

Exposure from current account surplus countries and short—don't overthink—short duration double Bs in the six to seven percent range. That's a pretty decent place to be right now.

Blerina, I'll ask you anyway—I know you're not a portfolio manager or an economist, but feel free to answer as well.

I would give the same answer as Arif—that's the opportunity to buy US Treasuries, because of everything that we've said about the central bank and how it's going to step in in that scenario.Okay. Well, that brings us to the end of our panel discussion. Thank you to Arif and Ken for joining me here in the studio in London, and to Blerina and Samy for joining from Baltimore. And thanks to everyone who took time to join us today. We hope you found this session useful. As mentioned earlier, there are additional materials that you can download and review, and please do share your feedback with us—we'd love to hear from you.Finally, please do join us for our next webinar in the series in the spring, where Arif Hussain and I will once again look to answer some of your biggest questions in fixed income.

Bye for now.