Why it’s time to be bullish on bonds

1) An attractive entry point for bond investors

At the moment, government bond yields are at decade-high levels, presenting what we suggest is an attractive opportunity for investors to capitalise on these favourable conditions and potentially secure long-term benefits (see Figure 1, below). While short-term fluctuations in bond prices can be unpredictable, the longer-term outlook is primarily dictated by the yield, with a higher yield typically translating to greater returns over time. Unlike equities, where market sentiment can significantly influence prices even over extended periods, the fixed income market is by and large governed by mathematical principles, ensuring that performance tends to converge towards the initial yield, offering, we suggest, a degree of predictability and providing investors with a clearer and more reliable forecast of future returns. 

Figure 1. An attractive entry point based on yields at historically high levels (in this case, US Treasuries)

Source: M&G Investments, Bloomberg, 31 August 2025. 

An attractive risk-reward proposition

Current bond yields are not only historically elevated, but based on our analysis, present a potentially strong risk-reward proposition (see Figure 2, below). We have moved beyond the post-Covid boom, which was marked by abundant liquidity, rising inflation, and consequent rate hikes by central banks. Today, inflationary pressures have significantly eased, and economic growth is slowing, with indicators generally suggesting further downward pressure. This late-cycle environment inherently restricts the extent to which rates can continue to rise, limiting the downside risk for holding bonds. 

On the other hand, the potential upside could be substantial for investors willing to hold meaningful exposure to fixed income, particularly if a recession materialises (this is not our base-case view). Unlike previous cycles, governments are now heavily leveraged, limiting their capacity to stimulate the economy through fiscal measures. This situation necessitates a stronger reliance on monetary policy, implying that rates may need to be cut more aggressively, potentially revisiting the zero bound. Clearly there is also a scenario where the economy remains unchanged and rates stay stable, but in that situation, you are currently well compensated to ‘sit and wait’. 

Figure 2. A potentially attractive risk-reward based on return scenarios of 10-year US Treasuries

Source: Bloomberg, 31 August 2025. Past performance is not a guide to future performance. The scenarios presented are an estimate of future performance based on evidence from the past on how the value of this investment varies, and/or current market conditions and are not an exact indicator.

3) Bonds – A cheaper alternative to stocks?

After years of extremely low yields, which pushed investors towards stocks and fostered the impression that there was no alternative, we now find ourselves in a situation where an alternative exists. Interest rates are currently at decade-high levels, providing asset allocators with a perceptively attractive hedge against their riskier positions. Moreover, bonds appear more attractive than stocks at present, based on our analysis. The chart, overleaf, illustrates the implied long-term returns of stocks versus bonds, demonstrating the shift from an environment where stocks appeared to be the sole option to one where bonds look historically attractive. Crucially, our data shows the belief that stocks always outperform over extended periods is simply not true; it depends significantly on your starting point! For example, investing in the S&P 500 in 2000 would have meant holding that position for around five years in order to return to positive territory - and over 15 years to begin outperforming bonds. According to our analysis, this path to positive returns is even longer in stocks markets outside the US. Valuations are crucial, especially over a long-term horizon, emphasising the importance of considering bonds as a viable and potentially stronger investment option today.

Figure 3. Bonds are back - an alternative to stocks for the first time since 2002!

Source: M&G Investments, Bloomberg, 31 August 2025. Past performance is not a guide to future performance.

Figure 4. Stay active! As rates become more attractive, you want to own more duration, not less

Source: M&G, Bloomberg, ICE BofA indices, 31 August 2025. Past performance is not a guide to future performance.

Taking advantage of our team’s experience

For us, our credit analysis team at M&G Investments stands as a cornerstone of active bond investing, delivering value through its depth, expertise, and rigorous approach to research. Led by Dave Covey and Anuj Babber, the team comprises 52 seasoned research analysts with an average of 21 years of experience per analyst and 32 sustainability specialists. Operating as one of the largest and most experienced teams in Europe, they cover a vast spectrum of sectors globally, from retail and consumer goods to energy, utilities, and technology, ensuring comprehensive insights across the investment grade bond universe. This extensive coverage, paired with their ability to generate real-time research on over 2,200 corporate and ABS issuers, equips the fund with a robust framework for identifying opportunities and mitigating risks, even in volatile market conditions. By producing proprietary internal M&G ratings and leveraging dual reporting lines to regional heads and the Head of Public Credit Research, the team delivers independent, high-quality analysis that can enhance our active management strategy—with the aim of ultimately driving superior risk-adjusted returns and alpha generation for our investors. 

Figure 5. Our global credit research and sustainability resources – One of Europe’s largest and most experienced teams  

Source: M&G Investments, as at 30 June 2025. () Years of experience. *Dual reporting line into regional Heads and Head of Public Credit Research. **personnel have shared Analyst/Portfolio Manager role.