When it comes to the bond market, most investors are a conservative lot. To that end, debt issued by governments tends to be the gold standard for many fixed-income portfolios. After all, nations like the United States, the U.K., and Germany have numerous tools to prevent defaults. At the same time, entities such as the European Union can provide substantial backstops for sovereign debt. So, it’s no wonder that so many fixed-income investors use these bonds as the basis for their bond portfolios. There is plenty of safety and good income to be had.
However, some cracks may be developing in that thesis. These days, investors may receive a better risk-reward proposition by taking on a little more credit risk.
Corporate bonds, as well as high-yield and emerging market debt, could offer higher returns and stronger yields than treasury or sovereign debt. Investors considering only government bonds may be selling themselves short and taking on more risk than they realize.
A Change In Regime
For many sectors of the market, recent geopolitical woes have potentially altered the landscape. This is particularly true for fixed income segments, especially government debt.
We are all aware of the challenges facing U.S. Treasury debt.
President Trump’s continued tariff plans have increased the risk of a recession and inflation. In theory, that should make high-quality bonds, such as U.S. Treasuries, very attractive. However, tax changes in the One Big Beautiful Bill Act (OBBBA) and spending plans are expected to cause the budget deficit to rise even further above current levels. Projections from the Congressional Budget Office (CBO) now show that the deficit is likely to increase by $3.4 trillion over the next decade. That has many bond investors questioning the safety and appeal of U.S. treasuries, demanding higher yields to overcome potential risks.
The yield on the 10-year has remained above 4.4% for weeks now.
The kicker is that it’s not just the U.S. that is experiencing some shifts in its fiscal policies. Germany has long been a stalwart of safety when it comes to global sovereign bonds. This has come from its low-spending and conservative mantra. However, the nation- partly in response to U.S. tariffs- has enacted several major spending plans for infrastructure, defense, and exemptions from its “debt brake.” This shift in spending has had significant effects on risk repricing in the European sovereign bond market.
Following suit, other nations across developed Europe have also been confronted with newfound challenges and increased spending plans.
This has led to a significant shift in the world of fixed income. Sovereign and treasury debt may not be as safe or risk-free as investors initially thought.
Higher Yields & Strong Returns
However, as developed market government debt appears riskier, corporate debt and debt with a minimal credit risk have only improved. Changes to credit ratings, enhanced financials, and continued high yields have made those bonds with credit risk potentially outperform their government counterparts over the long term.
For one thing, yields and spreads are still attractive.
Today, the Bloomberg US Corporate Bond Index has average yields still near the high end of its 15-year range. The average yield-to-worst of the index has hovered between 4.75% and 6.5% since late 2022. To put that into perspective, in the years following the global financial crisis, the average yield of the index rarely exceeded 4%. Spreads have contracted slightly as investors have begun to look beyond the world of sovereigns. However, the 85-basis-point option-adjusted spread of the index is still not historically low. 1
At the same time, the credit risk of corporate debt —both investment-grade and high-yield — has only improved.
According to T. Rowe Price, the average credit rating of the Bloomberg U.S. High Yield 2% Issuer Cap Index, which examines junk bonds, was significantly higher as of the end of the first quarter of 2025 than it was 10 years prior. BB-rated bonds now comprise 50% of the market. Meanwhile, lower quality CCC bonds are at 10%, compared to the 40% and 20% weightings in the pre-Great Recession average. 2
At the same time, the amount of cash and assets securing corporate bonds has remained strong. One‑third of the non‑investment‑grade bond market is secured by assets or other collateral. This chart from Charles Schwab highlights that the ratio of corporate liquid assets to short-term liabilities remains strong, at over 90%, and above the levels reached during the Great Recession. The significant decline in recent years was due to COVID.
Source: Charles Schwab
Therefore, bonds issued by corporations offer stronger yields and credit quality compared to those of sovereigns. What about other sovereign nations? It turns out that emerging market bonds may provide plenty of stability and yield in exchange for relatively little additional credit risk.
According to T. Rowe, many emerging market nations —such as those in Latin America —are immune to many of the tariff policies and widespread trade implications. Secondly, many in Asia are quickly benefiting as manufacturing moves from China to these nations to skirt trade and tariff rules.
Then there is credit to consider. Emerging markets have a moderate debt-to-GDP ratio of 69.4%. This compares to the higher debt-to-GDP ratio of 126.5% for the developed world. Moreover, emerging markets appear more favorable when compared to other fiscal metrics, such as fiscal deficits and current account deficits.
These factors, coupled with their higher yields, make emerging market bonds another top choice outside the world of sovereign and treasury debt.
Looking Outside Treasury & Sovereign Debt
Given the potential for lower returns, higher risks, and losses, investors may want to consider spreading some of their fixed income assets away from treasury bonds and sovereign debt. By taking on a little more “perceived” credit risk, investors can score better yields and potentially better long-term outcomes. The trio of corporate bonds, high-yield bonds, and emerging Market debt could all provide a significant boost to a portfolio.
There are many ways you could do that.
Many dynamic and flexible bond funds have expanded and offer exposure to these sectors with an active tough.
However, given the growth of ETFs, adding these sectors via passive means to quickly overweight them is indeed very easy. Numerous funds offer broad exposure to these sectors.
Broad Emerging Market Bond ETFs
These funds were selected based on their exposure to emerging markets, whether local or USD-denominated. They are sorted by their one-year total return, which ranges from 3.4% to 5.9%. They have expenses ranging from 0.20% to 0.50% and AUM between $290 million and $ 15 billion. They are currently yielding between 5.4% and 7.2%.
| Ticker | Name | AUM | 1-Year Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| EMB | iShares J.P. Morgan USD Emerging Markets Bond ETF | $14.9B | 5.9% | 5.44% | 0.39% | ETF | No |
| VWOB | Vanguard Emerging Markets Government Bond Index Fund | $5.87B | 5.8% | 6.2% | 0.20% | ETF | No |
| EMHC | SPDR Bloomberg Emerging Markets USD Bond ETF | $291M | 4.2% | 7.2% | 0.23% | ETF | No |
| PCY | Invesco Emerging Markets Sovereign Debt ETF | $1.33B | 3.4% | 6.8% | 0.50% | ETF | No |
Junk Bond ETFs
These funds were selected based on their exposure to the junk bond sector and yields. They are sorted by their 1-year total return, which ranges from 7.6% to 11%. They have expenses ranging from 0.05% to 1.27% and assets under management between $1.36 billion and $ 15.2 billion. They are currently yielding between 5.9% and 8.1%.
| Ticker | Name | AUM | 1Y Total Ret (%) | Yield | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| HYLS | First Trust Tactical High Yield ETF | $1.54B | 10.9% | 6.4% | 1.27% | ETF | Yes |
| USHY | iShares Broad USD High Yield Corporate Bond ETF | $9.4B | 8.6% | 6.7% | 0.08% | ETF | No |
| SPHY | SPDR Portfolio High Yield Bond ETF | $1.36B | 8.4% | 8.1% | 0.05% | ETF | No |
| JNK | SPDR Bloomberg High Yield Bond ETF | $8.51B | 8.1% | 6.7% | 0.40% | ETF | No |
| HYG | iShares iBoxx $ High Yield Corporate Bond ETF | $15.2B | 7.6% | 5.9% | 0.49% | ETF | No |
Investment-Grade Corporate Bond ETFs
These funds were selected based on their exposure to investment-grade bonds at a low cost and are sorted by 1 Yr total return, which ranges from 3.1% to 7.3%. They have expenses of 0.03% to 0.36% and yields from 4.4% to 5.4%. They have assets under management ranging from $500M to $31B.
| Ticker | Name | AUM | 1 Yr Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| IGIB | iShares 5-10 Year Investment Grade Corporate Bond ETF | $15.3B | 7.3% | 4.6% | 0.04% | ETF | No |
| IGSB | iShares 1-5 Year Investment Grade Corporate Bond ETF | $21.7B | 6.6% | 4.4% | 0.04% | ETF | No |
| CORP | PIMCO Investment Grade Corporate Bond Index ETF | $1.33B | 5.9% | 4.8% | 0.36% | ETF | Yes |
| SPBO | SPDR Portfolio Corporate Bond ETF | $1.5B | 5.7% | 5.2% | 0.03% | ETF | No |
| KORP | American Century Diversified Corporate Bond ETF | $507M | 5.5% | 5.0% | 0.29% | ETF | Yes |
| LQD | iShares iBoxx $ Investment Grade Corporate Bond ETF | $30.4B | 5.2% | 4.4% | 0.14% | ETF | No |
| VCLT | Vanguard Long-Term Corporate Bond ETF | $11.1B | 3.1% | 5.4% | 0.03% | ETF | No |
All in all, newfound risks have emerged across the fixed income world. Today, investors looking towards government debt may be exposing themselves to greater risks and lower returns. For investors, taking on a little more credit risk could be a less risky proposition that could lead to better outcomes. The trio of corporate debt, high-yield, and emerging market bonds is the best way to achieve this.
Bottom Line
Government debt is supposed to be risk-free. However, in the current geopolitical landscape, investors considering sovereigns and treasuries may be facing an unseen risk. To that end, it’s best to embrace risk head-on outside government bonds. Corporate bonds, high-yield bonds, and emerging market bonds may be a better bet for portfolios.
1 Charles Schwab (July 2025). Corporate Bonds: Mid-Year 2025 Outlook
2 T. Rowe Price (June 2025). Bonds with credit risk may outperform government debt
