Investment opportunities in debt funds unveiled: A guide on how to engage
In the mid-year of 2025, the global debt market continues to hold significant importance in the world economy, despite its growing complexity due to geopolitical tensions, economic policy shifts, and increasing public deficits across major economies.
Size and Scale
Global debt levels continue to rise, with major economies such as the US, Japan, China, and European countries facing high debt-to-GDP ratios and persistent deficits. For instance, the US debt-to-GDP ratio stands around 120%, with projections towards 130% by 2030; Japan holds the highest ratio among major economies with a significant domestic debt burden.
Geopolitical and Economic Risks
The global debt market is affected by escalating geopolitical tensions (e.g., conflict involving Iran, India-Pakistan tensions) and economic uncertainties like US trade tariffs and oil price fluctuations. These factors have influenced bond market behavior, including sell-offs of long-dated US Treasuries and volatile emerging market debt spreads.
Monetary Policy and Yields
Interest rates have settled above pre-pandemic levels, with about 80% of global bonds offering yields above 4%, providing income opportunities. Central banks in emerging markets have shown mixed policies, mainly rate cuts except for certain outliers like Brazil. The US Federal Reserve anticipates potential rate cuts later in 2025 but remains cautious about labor market conditions.
Fiscal Trends Globally
Developed economies face pressures from aging populations, shifting defense priorities, and economic transitions. Germany and France are increasing defense spending, affecting fiscal deficits. China is running deficits around 8% of GDP to manage its economic rebalancing. Japan’s aging population adds strain on debt servicing.
Significance Compared to Equity Markets
The global debt market typically dwarfs equity markets in size. Sovereign and corporate bonds are foundational to global financial stability because they finance government operations, infrastructure, and provide benchmark yields that affect financing costs worldwide.
Debt markets also reflect broad macroeconomic conditions, influence central bank policy decisions, and serve as a gauge of risk sentiment, especially during geopolitical or economic uncertainty. Equity markets are more volatile and sensitive to corporate profits and growth prospects but do not underpin global economic financing to the same degree as debt markets.
The widespread issuance and trading of debt instruments allow governments and corporations to access capital more flexibly than through equity. This also means that shifts in the debt market (e.g., rising yields or spread widening) can signal or precipitate economic stress sooner than equity market moves.
In Summary
The global debt market in 2025 remains a fundamental pillar of the world economy, characterized by elevated debt levels, geopolitical risks, and evolving monetary policies, with a scale and economic significance that generally surpass equity markets due to its direct role in government finance, economic policy, and stability.
Investors should be cognizant of the high debt-to-GDP ratios and persistent deficits in major economies, such as the US, Japan, China, and European countries, when considering investment opportunities, given the significant impact they have on investment trusts.
Investing in bonds, particularly those offering above 4% yields, can prove advantageous in this economic environment, as central banks worldwide, including major emerging markets, have shown a trend of mixed policies and potential rate cuts.
Given the size and scope of the global debt market's influence on macroeconomic conditions, central bank policy decisions, and global financial stability, dividends and interest rates from investment trusts investing in bonds can provide valuable returns, especially amid geopolitical or economic uncertainties.
