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Michael Lienhard examines spreads in light of current geopolitical and societal shifts
When I use the word “spread,” most people assume I mean credit spreads. After nearly two decades in fixed income, that would be a fair assumption. For most of my career, a spread was a measurable premium for risk, liquidity or duration — a number to be analysed, compared and priced.
Over time, fixed income has become more than just a professional focus for me. These markets form the structural backbone of the financial system. Bonds are where trust is translated into price, where funding conditions shape economic reality and where confidence becomes measurable. What fascinates me most is that this architecture operates quietly beneath the headlines, yet it determines how governments finance themselves, how companies invest and how risk circulates through the system.
I have always been drawn to environments where structure matters more than spectacle. If equities can sometimes resemble high-speed competition, fixed income feels more like strategic board play: patience, anticipation and positioning tend to matter more than reflex.
At times, I could probably recite the technical vocabulary of the asset class almost like lyrics. In the song “MFG” by German hip-hop group Die Fantastischen Vier, three-letter abbreviations are lined up in rhythmic precision — ARD, ZDF and C&A. In our fixed income world, the refrain would sound different but no less familiar: CDS, ASW, FRN. (Credit Default Swaps, Asset Swaps, Floating Rate Notes, for those who wish to know.)
In its technical meaning, a spread is always measured against something — typically against a benchmark considered unquestioned and stable. How much more does a corporate bond yield relative to the German Bund? Or versus a US Treasury? The very expression “versus the Bund” or “vs. the Treasury” carries an implicit assumption: that the reference point itself is solid and beyond doubt.
Over the past few years, however, I have noticed that conversations with clients have changed. Where discussions once revolved around relative value within credit, they now increasingly revolve around the stability of the broader framework itself. “Vs. the German Bund” or “vs. the US Treasury” is no longer automatically associated with the premise that those benchmarks are unquestionable.
In light of the geopolitical and societal shifts we are witnessing, I have started to think of spreads less as simple numerical differences and more as signs of underlying tension. When the anchor itself begins to drift, the spread is no longer measured against something fixed. It becomes the distance between two moving forces. Once you begin to see spreads this way, you start noticing them beyond markets — wherever rules exist and their enforcement is tested. Imagine the following situation. There is a queue in a supermarket. An elderly woman is patiently waiting when, suddenly, a sporty young man steps in front of her.
“Excuse me. Why did you do that?” asks the woman. “It’s very rude.”
“I beg your pardon,” says the man. “This is not meant as an offense and I apologise for the inconvenience. But I did it because you are unable to remove me.”
In that moment, two realities coexist: the rule of order and the enforceability of position. The rule — in this case, of fairness to the elderly woman — remains valid. But its enforceability does not. The tension between the two is a form of a spread. This distinction between declared principle and enforceable reality is not new. In the 19th century, European statesmen such as Germany’s first chancellor Otto von Bismarck were associated with the concept of Realpolitik — a form of politics guided less by moral aspiration and more by pragmatic power, national interest and constraint. Realpolitik does not reject values; it recognises that outcomes are shaped by enforceability. In 2026 it feels like we are back in such a regime.
Financial markets operate similarly. They do not price declared intention. They price capacity and constraint. In finance, a spread is the difference between two prices, rates or yields. Most commonly, it refers to the gap between the yield of a risky asset and that of a supposedly risk-free one. Spreads compensate for uncertainty. They measure distance between expectation and outcome, promise and constraint, safety and risk.
For much of the past decade, developed markets functioned in an environment where normative frameworks and enforcement capacity appeared aligned. Monetary policy acted as a stabiliser. Central banks absorbed shocks, compressed volatility and anchored expectations. Sovereign bonds were widely perceived as the stable reference point of the system, while corporate credit carried the risk premium. That alignment has shifted.
The spreads we observe in fixed income markets are often the consequence of spreads that have emerged elsewhere
In recent quarters, sovereign bond volatility has at times exceeded investment-grade credit spread volatility. Currencies and gold have reacted more strongly to fiscal developments and geopolitical shifts than many corporate balance sheets. In other words, the framework that defines the rules has become more volatile than many of the entities operating within it.
Historically, the state shored up stability and corporations were priced relative to that foundation. Today, fiscal trajectories, political commitments and structural spending paths have become primary drivers of uncertainty. Unlike monetary policy — which can be adjusted meeting by meeting — fiscal decisions are long-dated, politically binding and often difficult to reverse. Markets therefore increasingly price fiscal credibility, execution capacity and long-term sustainability rather than central bank fine-tuning alone.
Financial markets do not invent these tensions; they measure them. The spreads we observe in fixed income markets are often the consequence of spreads that have emerged elsewhere — in fiscal behaviour, political commitments and the widening gap between narrative and constraint.
This broader regime shift becomes even more relevant when viewed through the lens of technological transformation. The February 2026 Citrini report on artificial intelligence highlights how rapid technological acceleration may reshape productivity, labour markets and capital allocation in ways that are difficult to forecast with precision. AI will, over time, enhance productivity and exert disinflationary forces. Yet the transition phase is likely to increase dispersion between sectors, companies and business models.
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Periods of structural change tend to amplify the importance of institutional stability and credible macro frameworks. When the economic landscape evolves quickly, the reliability of the rules of the game becomes even more valuable. If confidence in that framework weakens, volatility migrates to the level of the system itself.
This helps explain why we are living in what could be described as a “sell the government, buy the economy” environment. Sovereigns were once considered the unquestioned risk-free anchor. Today, investors scrutinise fiscal sustainability, policy credibility and structural competitiveness more closely. At the same time, many investment-grade corporates entered this phase with extended maturities, strengthened liquidity buffers and conservative leverage profiles. While the framework has become more uncertain, parts of the real economy have become more resilient.
How does this translate into bond portfolios? I currently hold no direct exposure to government or government-linked bonds. I also maintain limited exposure to banks, given their structural interlinkages with sovereign balance sheets and regulatory frameworks. Within corporate credit, this environment reinforces an up-in-quality bias. When the volatility of the framework rises, balance sheet strength, cash flow visibility and refinancing flexibility matter disproportionately. I therefore favour high-quality investment-grade issuers with resilient business models and conservative leverage.
Given the uncertainty surrounding the long-term interest rate path, I prefer the front end of the curve, focusing on maturities between two and four years.
I would not exclude a scenario in which the highest-quality corporate bonds trade at spreads that approach — or even temporarily fall below — those of core developed market government bonds. In a regime where fiscal credibility is questioned at the margin, the traditional spread hierarchy can invert. The assumption that governments automatically represent the lowest-risk borrower may not hold unconditionally.
Given the uncertainty surrounding the long-term interest rate path, I prefer the front end of the curve, focusing on maturities between two and four years. Demographics reinforce this cautious stance. Baby boomers are moving from producing goods to consuming services, particularly healthcare. This structural shift supports demand and may contribute to a mildly inflationary bias. At the same time, labour markets remain relatively stable and household balance sheets in many developed economies are not under acute stress.
In the near term, macroeconomic data remains relatively benign. Growth continues to be supported by fiscal tailwinds, easier financial conditions and ongoing AI-related investment, while inflation has gradually normalised. Yet markets increasingly focus less on the “spot” data and more on the forward-looking implications of technological disruption. The tension between a stable present and an uncertain future, particularly regarding labour markets, productivity and inflation, has widened the distribution of possible outcomes and contributed to elevated volatility.
Nevertheless, I trust the real economy, which does not yet appear fragile. Many well-managed investment-grade companies operate with prudence, adapt to changing conditions and have resilient consumer support. To succeed, one must invest where discipline and enforceability are strongest.
Which brings us back to the supermarket queue. The rule of order still exists. But in today’s political and financial world, markets ultimately care less about declared fairness than about enforceability. Spreads measure that distance. And when the distance widens, markets adjust — and portfolios must adjust with them.
Michael Lienhard
Head of Fixed Income, Cape Capital