Woolnough: Why government debt is losing ground

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Richard Woolnough, manager of the M&G Optimal Income fund, explains how investment grade debt could usurp the traditional risk-free status of sovereigns.

Conventional wisdom says that corporates should trade wider than their respective governments for two main reasons: default risk and liquidity. While this has historically been the case, things have changed dramatically during the long-lasting financial crisis. Many developed world governments’ balance sheets have deteriorated, while corporates have remained in quite good shape. As a result, the conventional wisdom on the relative pricing of risky corporates and risk-free governments is being challenged.   In a closed, purely domestic economy, sovereign default risk would be minimal...