Is the risk-free asset now a corporate bond?

Read the market analysis and fund positioning

France and the US are paying more for new debt than they have done for 24 years. In October, the yield on ten-year French government bonds rose to over 5%. The yield on 30-year US Treasuries also reached a level last seen in 2002, at around 5.7%.

France is now borrowing at a higher cost than the luxury goods group LVMH and is paying around 40 basis points (bps) more than Italy, which is chronically poorly rated. This last happened in the 1990s.
Across the Atlantic, S&P, for example, rates Johnson & Johnson as AAA, one notch higher than the United States. This raises the question: who is actually the risk-free borrower? A few years ago, that would have sounded absurd.

Credit risk in Paris, term risk in Washington

A government bond carries two risks. Credit risk determines whether you get your money back; term risk determines what the bond is worth by the time it matures. With a traditional risk-free issuer, the credit risk is zero and the term risk is manageable, because government bonds rise in value during crises and offset losses elsewhere in the portfolio.

France: The credit risk is very real. As a member of the monetary union, Paris is incurring debt in a currency over which it has no control. From an economic perspective, French government bonds are more akin to corporate bonds backed by sovereign authority. That is why a comparison with LVMH is a legitimate assessment of creditworthiness. And the results are not favourable for Paris. Public debt reached a new record high in the second quarter, standing at 119% of gross domestic product (GDP). The deficit is set to fall only slightly from 5.4%t to 5.0% by 2027, whilst the interest burden is set to rise to around 91 billion euros. Even if fully implemented, the budget would ‘merely slow the deterioration’, according to ING. Scope has reacted by downgrading the credit rating to A+.

The market is pricing in this risk so rigorously because no one else is paying attention. Many investors had pinned their hopes on the ECB, hoping that the central bank would not tolerate such a spread. Two members of the ECB Governing Council have dashed those hopes. Bundesbank President Joachim Nagel says the ECB’s instruments serve “price stability, not the management of individual government bond spreads”. Outgoing ECB Executive Board member Isabel Schnabel adds that one cannot “wait” for second-round effects. The ECB’s priority is inflation, not the French budget.

USA: No credit risk, but a maturity risk. From a fiscal perspective, the US is hardly in a better position. Government debt held by the market stands at just over 100% of GDP and, according to the Congressional Budget Office (CBO), is set to rise to 120% by 2036. At just over 6% (of GDP), the deficit is even higher than France’s. A default would nevertheless be a political decision and not a question of solvency.

Washington borrows in its own currency, and that currency is backed by its own central bank. Whilst the risk does not disappear, it shifts from the credit spread to the price of the maturity. In October, the term premium on ten-year US bonds, as measured by the New York Fed’s model, reached its highest level since 2014. And the Fed is not resisting this trend. In September, it raised interest rates for the first time since 2023, in the midst of a sell-off at the long end of the curve.

The Safe Haven, Diversified

This risk would be bearable if US Treasuries still provided reliable hedging for a portfolio. However, they now do so only to a limited extent. In September, they fell on all five days on which the S&P 500 lost more than 0.5%.

Since mid-October, however, the situation has reversed: doubts about AI investments are weighing on technology shares, and the yield on ten-year US bonds has fallen back below 5%. The crucial factor is obviously where the shock originates. If it comes from outside the bond market – from profits, growth or risk appetite – US Treasuries rise as they always have. But if it comes from within the bond market itself – from inflation, deficits or a central bank raising rates in the midst of a sell-off – shares and bonds fall together.

The long-dated US government bond is thus a form of insurance with an exclusion clause. It pays out for almost any loss, except for the one caused by the insurer itself. Ironically, the one scenario excluded is precisely the one at issue here: a sovereign whose debt is growing faster than the market is willing to finance. Such a security will almost certainly be repaid. But it is not risk-free in the portfolio sense.

Paris and Washington are therefore suffering from the same malady, albeit with different symptoms. In the eurozone, this manifests itself in the spread; in the US, in the term premium. Both countries lack the will or the strength to impose hardship on their voters, so their public debt continues to grow rapidly.

This malady is shared by many mature economies.

Why European companies can be the better debtors

When the state itself becomes a credit risk, it is worth taking a look at corporate bonds in Europe. Five-year investment-grade bonds are yielding over 4%. Many issuers have strengthened their balance sheets, whilst governments have continued to pile up debt. The energy crisis highlights the difference. A company with pricing power passes on higher costs to its customers. The government, on the other hand, pays for fuel subsidies, intervenes in gas storage and, on top of that, bears the burden of rising interest rates.

In the US, this argument does not hold water, for two reasons. Firstly, even a corporation such as Johnson & Johnson cannot be any safer than the United States itself in the event of a dollar crisis. Its financing, its collateral, the legal framework and its own liquidity are all tied to the dollar system. The market has priced this in: when Moody’s stripped the US of its top rating in May 2025, Johnson & Johnson’s ten-year bond was yielding a good 50 basis points above the comparable Treasury, and the spread did not narrow. US Treasuries remain the foundation on which the system rests.

Secondly, a better-rated issuer does not solve a maturity problem. A ten-year Johnson & Johnson bond carries the same maturity risk as a ten-year Treasury, plus credit risk. Therefore, no corporate bond can mitigate the US-related problem; only a shorter maturity can.

Over 170 basis points: a buying opportunity or the new normal

Have the spreads now become too high? There is little to suggest this is the case for France. Vanguard considered a spread of over 150 basis points against the German government bond to be realistic; in October, it stood at more than 170. In the US, investors are demanding a maturity premium of just under one percentage point for ten-year Treasuries.  That is not excessive either:  in the short term, both spreads could fall – in Paris, for example, through a credible budget compromise. This does not alter the assessment. Governments that do not cut spending and central banks that do not step in do not constitute a cycle. They constitute a regime.

What does ‘risk-free’ even mean anymore?

The textbook risk-free investment has two characteristics: the debtor cannot default, and it offers protection in a crisis. Paris no longer reliably fulfils the first condition. Washington fulfils the second only as long as the crisis does not originate in Washington. The risk-free option has not, therefore, disappeared. It has simply shifted: in the eurozone, from the government to sound companies; in the US, from the long end to the short end of the yield curve.