What place do government bonds have in portfolios? - 19 January 2026

Just behind the risk of an AI bubble bursting, fears of a sharp rise in long-term interest rates have been among the risk scenarios frequently cited by investors for several quarters. On average, however, G7 government bonds did not fall in 2025 and remain a useful hedge against certain risks – but not all – in diversified portfolios.

On a GDP-weighted average basis, G7 10-year rates have been trading within a fairly narrow range for several months, between 3.5% and 3.8% (Chart 1). In 2025, across all maturities, the Bloomberg G7 government bond index will have climbed 3.5% (currency risk hedged), slightly more than money market rates.

However, behind this apparent stability lies a certain nervousness. Riskier, very long-term bonds (30 years or more) have seen their yields continue to drift upwards (Chart 2), particularly in Japan, Germany, France and Canada.

This trend reflects a certain degree of investor mistrust of bond risk. The Bank of America survey conducted in December 2025 confirms this, with 19% of fund managers surveyed seeing a destabilising rise in long-term rates as the main risk to the markets, after the risk of the AI ‘bubble’ bursting (38%).

With investors now more optimistic about the global economic outlook, it is logical that they are not rushing to buy government bonds, which are more of a safe haven against the risk of an economic slowdown. However, indicators show that inflation remains below expectations (Chart 3), which is rather reassuring for bond markets. The latest figures published in the United States (+2.6% on the CPI excluding food and energy in December, despite customs duties) are even quite encouraging.

But mistrust of government bond markets is also fuelled by other legitimate concerns, including high public debt, the consequences of Japanese reflation, and attacks on monetary and fiscal orthodoxy.

For the time being, however, Donald Trump's attempts to destabilise the Federal Reserve are facing strong institutional and political opposition in the Supreme Court and Congress. The counterbalances are also powerful in Japan, which should limit the scale of the fiscal stimulus sought by the new Prime Minister Sanae Takaichi.

Furthermore, risk premiums on government bonds are often high today, which argues against a diagnosis of complacency. Real 30-year rates, adjusted for inflation expectations, have risen sharply and are now attractive from a medium-term perspective (Chart 4).

In our global portfolios, we are interested in government bonds primarily as a hedge against equity risk. What we are looking for are asymmetric hedges: if the equity market rises, the hedging assets should ideally fall only slightly, and if equities fall significantly, we expect the hedging assets to rise. This requires two conditions: their valuation must be sufficiently attractive, and their correlation with the equity market must be negative. For government bonds, these conditions were no longer met from 2021 to 2024, but they improved significantly in 2025, leading us to reinvest in these assets. The correlation between equities and government bonds has indeed turned negative again, and yield curves have steepened as a result of lower short-term rates (Chart 5).

In recent weeks, US government bonds seem to be gaining interest as a hedge asset. With the US economy perceived – often somewhat exaggeratedly – as highly dependent on the AI boom, the recent volatility of the Nasdaq tends to reinforce demand for Treasuries. If the AI boom were to subside, investors would undoubtedly become less optimistic about the US economy and anticipate further rate cuts by the Fed.

In our global portfolios, we are therefore maintaining our exposure to government bonds, especially as our equity pockets are overweight in cyclical themes. This hedging strategy is favourable for the moment, but it is not without risk. The main risk would be an inflationary global economic recovery, which would cause long-term rates to rise sharply due to higher inflation expectations. Certain developments, such as the rise in industrial commodity prices, the rise in electricity prices in some countries, and Donald Trump's plan to send cheques to American households in order to win the mid-term elections, are therefore the focus of our attention.