Bonds: the coupon is not enough and diversification changes meaning

Bonds are once again offering income, but that does not mean it has become easy to build a defensive portfolio. A higher coupon can offset part of the swings, without eliminating interest-rate risk, issuer quality or the difficulty of selling when needed. This distinction is central to MFS’s September 2026 analysis (Massachusetts Financial Services, a financial services company from Massachusetts), dedicated to diversification in fixed-income markets and shared with the editorial team in the Italian October version. The contribution by Pilar Gomez-Bravo and Benoit Anne proposes reading this phase through the growing divergence of monetary policies and competition for resources. The point is not to chase yields indiscriminately, but to understand which risks are being bought along with those yields.

Scarcity also affects financing

In the managers’ reading, the issue of scarcity goes beyond commodity markets and extends to energy, infrastructure and capital. The development of artificial intelligence requires data centres, power grids, plants and skills: investments that must find financiers in the same market approached by governments and traditional companies. This does not mean that every new issue automatically pushes rates higher. It means that demand for funding can remain strong even when some economies slow, making the expectation of a broad return to very cheap financing less straightforward. According to MFS, competition for resources helps explain why investors may continue to demand higher real returns. It is an interpretative key, not a certain forecast for the performance of all bonds.

Real return in turn requires clarification. The expected one depends on the inflation that the market factors into its pricing; the one actually achieved will depend on the inflation that materialises over the investment period, as well as on the cash flows collected. A security with an attractive nominal yield may do little to protect purchasing power if prices rise more than expected. And an issue linked to a technology project does not become high quality simply because it operates in a growing sector. One must distinguish the prospects of the technology from the ability of the individual company to generate cash, pay interest and repay principal. An industrial transformation can produce economic winners and, at the same time, losses for those who financed the wrong operators or projects.

Japan matters for those investing elsewhere too

Among the elements highlighted in the analysis is Japan’s change, after decades marked by low inflation and very low rates. For MFS, the normalisation of Japanese monetary policy is a relevant variable for the entire bond system. The mechanism also passes through the choices of large investors: when opportunities in the domestic market and currency hedging costs change, the appeal of holding foreign debt can also change. This does not mean predicting an inevitable or uniform repatriation of capital, but recognising that a European portfolio can be affected by decisions taken far from Europe. The yen also adds a source of volatility: a strong result for the security in its original currency can be amplified or erased by exchange rates for those measuring assets in euros.

Maturity alone does not tell the story of interest-rate risk

The key technical issue remains duration, the financial duration that takes account of the timing of cash flows. To estimate price sensitivity to yields, modified duration is used, with the necessary approximations. A security with a value of seven for this indicator can lose about 7% if the yield rises by one percentage point, or gain a similar amount if it falls; the example assumes small changes and comparable conditions, does not take convexity into account and is not a simulation of a real instrument. Two bonds with the same maturity can have different sensitivity, because coupons and prices distribute the value of payments differently. Buying long-dated securities in anticipation of central bank cuts is therefore a precise directional bet, not a neutral choice.

MFS suggests paying more attention to valuation differences across maturities and markets than to a single wager on falling rates. The yield curve describes the compensation required for lending over different horizons; its points can move in uneven ways. A cut in the policy rate does not, by itself, guarantee an equivalent decline in ten- or thirty-year yields, which also incorporate expected inflation and a premium for future uncertainty. Seeking relative value means comparing instruments and segments after isolating these factors, rather than confusing a higher coupon with a more attractive valuation. This becomes particularly delicate when currency exposures are added: the return on a foreign bond must also be read in light of any cost of hedging the exchange rate.

In credit, what the spread compensates for matters

The distinction reappears in corporate debt. The credit spread is the extra yield demanded over a comparable benchmark and reflects, among other things, default risk, expected recovery and liquidity. In its analysis, MFS favours issuers with stronger credit quality as the central component, while remaining selective in the riskier segments. This is the manager’s approach, not a solution suitable for every portfolio. Even among companies considered solid, there may be sector concentrations or maturities exposed to the same shock. A large share of bonds issued by technology companies, for example, can add to equity exposure the same economic factors already present elsewhere in the portfolio. Increasing the number of instruments is not enough if all depend on the same source of risk.

The analysis also draws attention to private credit, meaning financing negotiated outside listed bond markets. A lower frequency of valuations does not necessarily mean lower economic risk: it can make less visible the swings that would emerge more quickly in a market with continuous trading. Loan structure, borrower leverage, contractual clauses and the repayment method of the investment vehicle then become essential. Not all private credit instruments are the same, and it is not correct to describe them all as fragile; equally wrong would be to equate the apparent stability of a periodic valuation with immediately recoverable cash. Liquidity must be assessed when it is needed, not only when conditions are favourable.

Diversification also means protecting decision time

The impact on wealth is concrete. Spreading the portfolio across issuers, countries and maturities can reduce some concentrations, provided that one checks how exposures react together to inflation, rates and credit stress. Keeping a reserve consistent with foreseeable expenses also helps avoid forced sales in an unfavourable phase. Liquidity has an opportunity cost and does not automatically protect against inflation, but it gives time to choose. That is the most useful meaning of the defensive income referred to by MFS: seeking remuneration without making the whole result depend on a favourable scenario. The coupon remains important; the quality of a portfolio is also recognised by its ability not to force the investor to make decisions at the worst possible moment.