Where can bond investors find yield as interest rates fall?

Because fixed income - and credit especially - has such a broad field of opportunities, there’s a surprisingly wide range of options.

Sovereigns steepening?

Buying government bonds feels like an interesting option in many cases, because sovereigns haven’t rallied as much as corporates. But it’s important to be aware of fiscal risks from countries including the USA, UK, France, and Japan, where spending is outstripping government income.

On top of this, inflation is back and rising. These are the two main reasons why curves have steepened for government bond markets around the world (in other words, longer yields rising faster than shorter yields).

Short and sweet?

For the most cautious investors, shorter-dated bonds likely have around a year left before you’re going to be tempted away. Achieving yields in the high 4% area is still possible without going longer and increasing the volatility in your portfolio.

How volatile are longer-dated bonds?

That said, longer-dated is starting to become more attractive. Going for longer-dated bonds does raise your volatility risk. But compared to many other competing markets, we believe there isn’t as much volatility as might be feared.

Look at this chart of 10-year US Treasuries vs inflation and the S&P 500 in percentage change since the start of the century.

Source: Aberdeen, Bloomberg September 2025. For illustrative purposes only. No assumptions regarding future performance should be made.

And now the extra yield from going longer is starting to pick up. Below, we show today’s credit curve for top-rated investment grade bonds (broadly A rated) in the USD credit market, compared to just two years ago, where you were much better keeping it shorter. The x axis is years until redemption of the bonds:

Chart 2: The extra yield from going longer is starting to pick up

Source: Aberdeen, Bloomberg September 2025. For illustrative purposes only. No assumptions regarding future performance should be made.

Being selective

So, which sectors of the economy are still of interest for credit investors? Being increasingly selective makes a lot of sense given that premiums (extra yield over risk-free bonds) have been reduced so much over the last couple of years. But there are opportunities (1).

Useful utilities?

Utilities are a haven in times of economic uncertainty, and this is still the case in many parts of the world, but good yields are available and can be enhanced by buying longer- dated bonds.

For example, in US dollars, going longer into the 15-year area for single A can achieve 5.5%. In euros there is less choice but still a 10-year single A yields 3.5%.

Sterling is a little different, however. Following Thames Water’s downgrade to high yield in 2024, much of the sector still trades with a healthy premium. Single A sterling utilities are available at 6% for a length of 15 years.

Real Estate recovery

Real Estate the world over has recovered much of its poise following a hard time during the Covid pandemic. However, there are still decent pockets of value.

A move further out on the curve provides better return potential. US dollar single A bonds from real estate investment trusts (REITs) in the same 15-year area have a 5.3-5.5% yield, euro (again not a market with many longer bonds) around 4% for A rated, and sterling 5.9-6%.

Banking on banks?

Banks, where we have seen a really strong performance from credit in the last 2-3 years, still offer appealing opportunities as you move along the maturity curve. Keeping in the single A area, US dollar bonds will pay you 5.5% for 15 years, euro 3.7% for 10 years and sterling 5.7% for around 14-15 years.

These are all some of the best quality credits around, judged by having a broad single A rating. There are, as it’s fixed income, many other choices you can make. You could go down in quality/and or shorter for (at the moment) a small pick-up in yield. As always, fixed income is a rich environment for investors to select the risk and opportunities that suit them.

Opportunity set

The riskier end of the fixed interest spectrum can of course lead to a broader opportunity set with a wider set of risks and returns. An experienced fund manager can help clients to navigate these areas.

For investors focused on income, liquidity, and price stability, a strategy such as a short dated enhanced income portfolio targets highly rated fixed income with low interest rate sensitivity. This active strategy focuses on short-dated assets and has a mandate to invest in bonds with a maturity of up to five years.

For institutional investors with a yield focus, there are still many opportunities out there. But starting to consider longer-dated bonds in the mix could be a worthwhile use of time and risk budgets - especially given the quality available.

Final thoughts…

While the shortest dated bonds remain interesting for now, the appeal of high quality longer-dated paper is beginning to increase. As always, if you’re looking to enhance yield potential and minimise volatility, it’s important to be selective on a country, sector and company basis, and maintain a flexible approach.