Shifting bond markets: Resilience amid fragmentation

Corporate yields are above the past-20-year average, despite tightening spreads, due to higher benchmark government bond yields. These yields reflect robust sovereign debt supply, as many countries face mounting fiscal pressures from increased defence spending, infrastructure investments and social programs. Past yields were arguably reduced by the extended period of near-zero policy rates in some key central banks following the Global Financial Crisis. We do not expect a return to that in the foreseeable future, with the federal funds rate staying above 3% in our latest forecast, and the 10-year yield remaining just below 4%.

Issuers appear to have adapted to the uneven impact of tariffs, supported by resilient economies and profitability. Conflict in the Middle East and the Russia-Ukraine war have not significantly disrupted economic activity. They occur amid downward pressure on commodity prices due to factors such as increased oil supply from OPEC+. Ample market liquidity has quickly moderated volatility spikes. Future circumstances and outcomes could differ, and these geopolitical event risks are just one manifestation of deeper structural changes at play.

Sector concentrations surge amid strong bond issuance

The tech sector, particularly expectations surrounding the transformative potential of AI, drives a significant share of market buoyancy. The same is true for bond markets. The AI investment boom coincided with increased issuance from high-tech companies. Occasional “digestion phases” for AI investment and adoption are likely, but these should occur during periods of structural growth, which could support strong issuance. The proportion of high-tech issuance to the total is now roughly equal to that of utilities, the usual leader, at close to 17% of the global nonfinancial corporate total in the 12 months through November 2025. We expect additional capital expenditure of between $4 trillion and $5 trillion through 2030. This could be too large for the bond market to absorb alone, but debt financing should remain part of the funding mix.

Tokenized money market funds have expanded rapidly since early 2024, backed by traditional short-term US government obligations. These funds are used as collateral in decentralized finance and could grow substantially if they become eligible collateral in the broader financial market, particularly for derivatives.

Yet, tokenization volumes are limited, and robust secondary markets are yet to materialize. Technical interoperability challenges and a lack of widely accepted solutions for making on-chain cash payments are key obstacles. Adoption may be uneven as regulatory frameworks emerge at varying paces; momentum is greatest in the US. We expect tokenization to initially scale in the collateral operations of financial markets, as the ability to instantly swap an asset for a cash payment, part of a single transaction, will bring tangible commercial benefits to financial institutions involved in repurchase agreement transactions and intraday liquidity management. Digital bonds rated by S&P Global Ratings have been primarily issued by sovereigns and supranational entities whose debt is often used as collateral.

Stablecoins are increasingly being positioned as an essential pillar for enhanced liquidity and efficiency, to bridge traditional and digital markets and enable instantaneous settlement with lower fees. Improved network effects and regulatory clarity could speed up adoption. As interoperability improves and trusted on-chain cash payment tools, such as regulated stablecoins or central bank digital currencies, gain traction, the market is poised for exponential growth, with tokenized assets offering real-time settlement, fractional ownership and democratized access to capital. While initial digitalization may progress unevenly, the maturation of digital asset infrastructure could ultimately federate markets and enhance transparency.

The expansion of fixed income ETFs has affected market efficiency and investor accessibility

Global fixed income ETF assets under management reached $3.2 trillion as of Dec. 6, 2025. Strong growth momentum has emerged in the US and Europe, Middle East and Africa markets. Passive strategies maintain a healthy dominance (82% market share), but active bond ETFs surged 52% year over year to $0.59 trillion in AUM, signalling investors’ increasing appreciation for strategic credit selection capabilities. Investor allocation has diversified across fixed income segments, including Treasury securities, core fixed income, investment-grade corporate credit and high-yield instruments, bolstered by favorable yield environments and attractive expense ratios. This points to enhanced market accessibility and innovative product development. Passive investment remains core, but active investment is a material growth driver, especially when it comes to determining precision in credit selection, term structure and securitized niches.

Bond ETF usage has increased due to its structural advantages, which enhance market efficiency. They facilitate diversified fixed income exposure without the operational complexities inherent in individual bond acquisition. They also enhance transparency, including through intraday pricing visibility. Cost efficiencies, including reduced expense ratios relative to active management alternatives, combined with excellent execution flexibility, have accelerated adoption rates. We believe that potential liquidity differences between ETF secondary market trading and the underlying bond market depth are being increasingly well managed. The price discovery function of ETFs relative to underlying bonds has enhanced market transparency and efficiency in the overall financial ecosystem. ETFs have demonstrated considerable resilience across market conditions, and mechanisms are evolving to address potential stress scenarios.

Bond ETFs have created an additional liquidity layer, allowing investors to transfer risk exposure efficiently without requiring transactions in the underlying securities, enhancing secondary market effectiveness. They have also democratized bond market access, providing enhanced portfolio construction capabilities for both retail and smaller institutional investors. As the market matures, these instruments are proving their value as essential components of modern investment strategies, offering unprecedented access, efficiency and flexibility in fixed income allocation.

Cautious optimism from structural shifts

Global bond markets have adapted to shifting policy regimes and geopolitical uncertainty, but this resilience should not be taken for granted. Uneven progress and new challenges are likely, particularly as market structures and digitalization continue to evolve. Innovations are laying the groundwork for greater efficiency and flexibility, and, ultimately, these structural shifts offer reasons for cautious optimism, even if the journey remains complex and nonlinear.