I'm going to start with a controversial opinion.
Bonds are the most exciting area of financial markets right now.
Hear me out.
Imagine you’re sailing a vast ocean. For years, the winds – representing low interest rates – pushed you steadily forwards. But then unexpected squalls emerged – the pandemic, inflation, huge government borrowing, geopolitical tension and trade wars. The gentle breeze turned into unpredictable gusts.
While scary at times, these gusts create opportunities.
To explain why, I like to think of bonds through two lenses:
A 'steady' paycheck
You lend money to governments and companies and collect interest in return.
Stability and diversification
Traditionally less risky than shares and able to cushion your portfolio when stock markets fall.
In the wake of the pandemic, bonds lost these qualities.
Yields were so low, there wasn’t much income on offer. Then inflation surged and bond prices fell sharply.
It was a perfect storm that was bruising for many investors.
Fast forward to July 2025 and things are different and, dare I say it, exciting.
Why do bond markets look so exciting right now?
Yields are attractive, making a high and steady income possible once again.
Combined with a more benign outlook for inflation and interest rates, there’s also the potential for bonds to play their part in stabilising and diversifying portfolios.
And this isn’t just confined to one or two areas.
There are opportunities across the spectrum, from government bonds and high-quality corporate bonds to higher-risk areas like emerging markets and high-yield bonds.
But this doesn’t mean the risks have disappeared.
Even a cursory glance at global and financial news headlines highlights this.
As ever, navigating the pitfalls to find genuine long-term opportunities is a challenge, as is getting the right mix of bonds to achieve a balanced portfolio.
Here’s the ‘state of play’ across the main areas of the global bond market as we enter the second half of 2025 and where the opportunities could be.
This article isn’t advice. If you're not sure if a course of action is right for you, ask for financial advice. Remember, all investments and any income from them can rise and fall in value, so you could get back less than you invest. Yields are variable and no income is ever guaranteed.
Government bonds
Developed market government bond yields are around multi-decade highs, but there are good reasons for this.
Debt is high and set to rise further as governments increase spending on infrastructure and defence, while trying not to increase taxes (or even cutting them in the case of the US).
Investors have demanded more reward in the form of higher yields to compensate for the risks.
In turn, longer-dated governments bonds have been under the most pressure. They’re more sensitive to things like long-term spending plans and inflation because they have a long time until maturity.
So, when governments and central banks don’t appear to be in control of these things, investors question the returns expected from long-dated bonds, often demanding higher yields and causing prices to fall.
Shorter-dated bonds are a bit more sensitive to short-term expectations for interest rates.
But with interest rates more likely to be cut than increased, this could see prices rise – of course there are no guarantees though.
If the cuts come because economic growth is weaker, the diversification benefits of these bonds could benefit a portfolio.
Corporate bonds
Companies are generally in reasonable health, meaning they should be able to pay their debts – that is the essence of a corporate bond.
When you lend money to a company, you don’t need it to keep growing its profits as shareholders do to benefit from a rising share price. You simply need it to generate enough cash to pay the interest on its bonds and to repay the loan at the end of the term.
While economic growth might not be stellar, risks of a recession in the short term have abated.
Combined with the decent yields on offer, some investors have yet again taken interest in corporate bonds.
The counter to this is that the additional yield offered over government bonds (or ‘the spread’ in bond jargon) is historically low.
Investors aren’t earning much more for the additional risks of lending to companies.
But investors should know the difference between higher-quality investment-grade corporate bonds over their higher-yielding counterparts.
The former are issued by large multi-national companies which tend to survive the tougher times. The latter offer attractive income and are likely to appeal to investors who seek a high income, while accepting the higher risk.
Emerging market debt
This is another higher-risk area in the fixed income market.
The income on offer is generally attractive and they can provide some diversification to other high-risk parts of the market like global high-yield bonds.
The shape of an emerging economy though is important when it comes to emerging market local currency debt (which is bonds issued in an emerging market’s own currency, as opposed to US dollars).
It means these markets are more in control of their own destiny, with the ability to cut interest rates if necessary, as opposed to raising the US dollars to pay down their debts.
They could also see renewed interest if Trump shakes up global trade and investors turn away from US assets and the US dollar.
What’s next for US trade policy is clearly still uncertain and not without risk for emerging markets. For this reason, emerging market local currency bonds should probably only make up a small part of a bond portfolio.
What does all this mean for investors?
There are plenty of opportunities in the bond market to help create a well-balanced long-term portfolio to suit your risk appetite.
One of the most interesting parts of the bond market right now is high-quality global investment-grade corporate bonds.
They’re currently offering attractive yields, as well as a premium to government bonds.
The opportunity set is huge, spanning different countries and sectors, making it a fertile hunting ground for high-calibre active managers.
Unlike higher-risk, high-yield bonds, which are sensitive to economic growth, investment-grade bonds can also be more resilient.
However, there are potential hurdles in the way.
While I’m not expecting an imminent recession, there’s no denying that there are challenges to economic growth in the west.
At times like these, the benefits of diversification become even more obvious.
Investing with a good spread of managers who will have different views and biases to different countries, industries, and companies can help manage any market swings.
How to find opportunity in the bond market? – The HL Global Corporate Bond fund
The HL Global Corporate Bond fund has investments with five leading global investment-grade bond managers, blended into a balanced portfolio.
It offers an attractive income, paid monthly, with the prospect for some long-term capital growth.
We constantly analyse the markets and the performance of different fund managers to make sure the fund is in good shape to deliver its objectives.
The idea being that we do much of the heavy lifting, leaving you to focus on more exciting things than the day-to-day ups and downs of global bond markets.
Investors should note that this fund invests in riskier high yield bonds. Charges are also taken from capital which can increase income, but reduce the potential for capital growth over time.
The HL Global Corporate Bond fund is managed by Hargreaves Lansdown Fund Managers Ltd, part of the HL Group.