The New Divergence in Credit

Rather than geopolitical risks or growth concerns, another trend is currently shaping the credit markets: the growing divergence between government and corporate balance sheets. While many governments continue to increase their debt, companies are responding to higher financing costs with balance-sheet discipline and debt reduction.

In our view, it is precisely this distinction that explains why corporate credit remains remarkably stable despite a more challenging macroeconomic environment, and why risk premiums are trading near historic lows in many markets.

Corporate credit does not ignore the risks; it simply weights them differently. Governments are increasingly being penalized for lax fiscal policies and rising debt. Companies, on the other hand, are benefiting in many places from disciplined balance-sheet management and declining debt. Consequently, risk premiums in many credit segments remain near historic lows, even though long-term government bond yields, in particular, have recently come under pressure again.

A key reason for this lies in the market’s increasingly critical view of fiscal developments in many countries. There is a growing expectation that numerous governments are neither willing nor able to consolidate their budgets, and that public debt will continue to rise structurally.

Looking at the debt-to-asset ratios of governments and corporations (non-financials) in developed markets, the picture initially appears similar: Following the peaks reached during the pandemic, both sectors have reduced their debt. However, since the sharp rise in interest rates beginning in 2023, a clear divergence has become apparent. Companies continue to deleverage, while government debt is rising again (see Figure 1). Recent political developments and fiscal forecasts do not currently suggest a reversal of this trend.

Debt relief for companies. Not for countries.
Total debt of the private and public sectors, as a percentage of GDP

Source: Bloomberg, Bank for International Settlements; governments (BIS Advanced Economies Credit to General Government, Nominal, Adjusted for Breaks, % of GDP, CPNF5ROG Index) and corporations (BIS Advanced Economies Credit to Non-Financial Corporations, Adjusted for Breaks, % of GDP, CPNF5RNG Index); As of: March 31, 2008, through September 30, 2025.

The result: Investors are increasingly demanding a higher risk premium for government bonds, particularly at the long end of the yield curve.

The same pattern is evident in emerging markets as well, albeit in reverse. The private sector has traditionally had higher debt levels but has been gradually reducing them since 2020. Governments, on the other hand, continue to take on more debt. Same trend, different starting point.

Company debt relief. Countries do not.
Total debt of the private and public sectors, as a percentage of GDP

Source: Bloomberg, Bank for International Settlements; governments (BIS Emerging Economies Credit to General Government, Nominal, Adjusted for Breaks, % of GDP, CPNF4TOG Index) and corporations (BIS Emerging Economies Credit to Private Non-Financial Sector, Adjusted, % of GDP, CPNF4TPG Index); As of: March 31, 2008, through September 30, 2025.

In an environment of structurally higher financing costs, we favor issuers that use capital disciplinedly and actively strengthen their balance sheets. Accordingly, we remain constructive on corporate credit in developed and emerging markets.

As Bloomberg noted back in November: “Governments just carry on as usual—and nothing happens. Companies, on the other hand, have done their homework: They’ve reduced debt and remain disciplined in their spending.”¹

Sources:

¹ https://www.institional-money.com/news/maerkte/headline/bondmaerkte-kippen-warum-investoren-konzernen-mehr-trauen-als-staaten-246084