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Higher-for-longer policy rates have made this the best backdrop for earning income in bonds in two decades – without taking more interest rate or credit risk. We favor a mix of income sources. We like short-term government bonds: The U.S. budget bill passed last month highlighted a lack of fiscal discipline, while sticky inflation limits rate cuts, keeping us tactically cautious on long-term bonds. In credit, resilient growth has kept corporate balance sheets solid even with tariffs.
After the global financial crisis (GFC), bond yields slid as central banks slashed policy rates to near zero or below and bought bonds. That left investors starved of income unless they took risk in long-term bonds. In a stark switch-up, some 80% of global fixed-income assets now offer yields above 4% as interest rates have settled above pre-pandemic levels (see the chart below). That’s made assets like credit, mortgage-backed securities, and emerging market debt more attractive.
We have seen notable bond market developments this year. Credit spreads have been relatively steady even with sharp equity volatility. And investors are demanding more compensation for the risk of holding long-term bonds, leading to a steepening of global yield curves. The curve between 5- and 30-year U.S. Treasury yields has more than doubled this year to its steepest levels since 2021, according to LSEG data.
We see abundant opportunities to earn income. We prefer short- and medium-term government bonds given yields near 4%. Markets are pricing in multiple Federal Reserve rate cuts over the next year. Yet we see sticky inflation limiting rate cuts – even as renewed rate hikes are unlikely.
Our preference is partly driven by our caution on long-term bonds due to the lack of U.S. fiscal discipline and sticky inflation – though we could see occasional sharp rallies. The U.S. is issuing nearly $500 billion of debt weekly to fund its persistent budget deficits, per Haver Analytics. And the Congressional Budget Office expects the One Big Beautiful Bill to only add to deficits in the near term.
Trade tensions could cool foreign demand at a time when sustaining U.S. debt relies on their ongoing buying – as we noted in our 2025 Midyear Outlook. We’re watching the market’s ability to absorb heavy Treasury issuance. Fiscal sustainability is not just a U.S. story: In Japan, 30-year yields hit a record high last week as policymakers floated tax cuts before Sunday’s upper house election.
Higher U.S. policy rates mean interest rate differentials between the U.S. and other countries stay wide, revealing an array of global fixed-income opportunities. That’s because hedging foreign bonds back into U.S. dollars boosts the income they offer. Some euro area bonds, like Spain, offer yields above 5% with such hedging – higher than U.S. equivalents.
Credit has become a clear choice for quality. Spreads are historically tight, yet credit income remains attractive as balance sheets have held up alongside growth, even with tariff uncertainty. Default rates for U.S. high-yield credit remain about half the 25-year average, according to J.P. Morgan data. We prefer European fixed income over the U.S. given a more stable fiscal outlook, especially European bank debt given strong financial earnings and insulation from tariff impacts.
We get selective across and within regions. We went overweight U.S. agency mortgage-backed securities (MBS): Spreads are wider than historical averages, and we could see some investors switch from long-term Treasuries. We upped local currency emerging market (EM) debt to neutral this month: It has weathered U.S. trade policy shifts, and debt levels have improved.
We like a mix of income opportunities but stay selective due to fiscal sustainability risks. We favor short- and medium-term government bonds, U.S. agency MBS, currency hedged international bonds, and local currency EM debt.
Wei Li, Managing Director, is the Global Chief Investment Strategist at BlackRock Investment Institute at BlackRock Inc.
Jean Boivin is Managing Director, Head of the BlackRock Investment Institute at BlackRock Inc.
Rick Rieder Head of Fundamental Fixed Income – BlackRock, and Michel Dilmanian Portfolio Strategist – BlackRock Investment Institute, contributed to this article
Disclaimer
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.
© 2025 BlackRock Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. This article first appeared July 21, 2025, on the BlackRock website. Used with permission.
Image: iStock.com/Dilok Klaisataporn
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