Corporates vs. sovereigns: why corporates have the edge

October 15, 2025

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France shows why corporate bonds can beat sovereigns: some companies now borrow cheaper than the state itself.

In today’s market environment, with credit spreads tight, institutional investors are carefully weighing the relative attractions of different asset classes – notably sovereign and corporate debt. This is becoming increasingly pertinent as political uncertainty and falling rates mean sovereign bonds can no longer be considered “risk-free” or capable of offering the yield levels investors need. Across Europe, corporate bonds are increasingly emerging as a compelling alternative.

One of the primary reasons corporates appeal is the clarity and predictability of their cash flows. Large investment-grade companies often generate annual cash flows of 30 to 40 percent, while smaller issuers remain generally positive. This stands in stark contrast to sovereign issuers, whose revenues rely heavily on taxes and whose expenditure, constrained by politics and social obligations, cannot be easily cut.

Companies can adjust costs, manage capital expenditures and optimize pricing strategies, giving investors confidence that debt obligations are serviceable even in challenging market conditions. In France, this dynamic has become tangible: some corporate bonds are now trading inside the sovereign curve, a rare phenomenon highlighting the relative strength of private issuers compared with a government managing elevated debt levels and ongoing fiscal commitments.¹ 

Technical factors further support corporates. Demand for corporate credit has remained robust, underpinned by institutional inflows and the reinvestment of coupon income, which provides a stabilizing effect even in a tight spread environment.

Supply dynamics have also played a role: corporate issuance has been relatively constrained compared with sovereign borrowing, creating a scarcity effect that supports valuations. The combination of strong fundamentals and favourable technicals has led to corporate spread tightening, even as sovereign yields fluctuate with political and macroeconomic uncertainty.

Valuation considerations reinforce the appeal of corporates. Despite historically tight spreads, we believe companies offer a meaningful risk premium versus sovereigns. This premium, when combined with positioning along the yield curve, provides an opportunity to enhance total returns.

After years of flat or inverted curves, the recent steepening of European and US yield curves allows investors to capture roll-down effects in short- and medium-dated maturities, generating price gains in addition to coupon income.

With the US Federal Reserve having restarted its rate cutting cycle, these dynamics are likely to persist, benefiting active management strategies and increasing the attractiveness of corporate exposure.

Sector selection adds another layer of differentiation. Strong balance sheets and regulatory requirements make banks a relatively safe segment, while investment-grade automotive issuers benefit from strong balance sheets.

Conversely, sectors such as chemicals and parts of healthcare require selectivity due to overcapacity or post-pandemic restructuring. The diversity of corporate credit allows investors to pursue alpha while managing risk, something sovereign debt can only offer to a more limited extent, especially considering the dependence on macroeconomic and political factors.

Overall, the comparison between corporate and sovereign debt has shifted. While sovereign bonds remain important for liquidity and hedging, corporates increasingly offer better fundamentals, supportive technicals and total return potential. For institutional investors seeking both income and resilience, corporate bonds now present a persuasive alternative to sovereigns in an evolving credit landscape.

References

1. Financial Times, as of 14th September 2025, “French companies’ borrowing costs fall below government’s as debt fears intensify”.

 

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 by Muzinich & Co are as of October  2025 and may change without notice.

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