Bond investors see high debt levels as the greatest concern for the global economy. More than three-quarters of respondents consider high government debt as a possible trigger of a new recession or market crisis.

This is one of the conclusions of the second Global Fixed Income Study by asset manager Invesco, based on interviews with 145 bond specialists and CIOs in EMEA (Europe, Middle East and Africa), North America and Asia. Together the respondents account for assets under management of $ 14.1 trillion.

A possible new crisis in emerging markets, the Chinese debt position and the high debt of companies and consumers were also often mentioned as the likely cause of a recession or market correction. Rising interest rates will have a significant impact on financing costs and the number of defaults. A majority (60%) of bond investors expect rising risk premiums over the next three years.

The risk of central banks raising interest rates too quickly is estimated as being much lower: less than one in three fear this scenario. Geopolitical tensions, a housing market crisis or the break-up of the eurozone are also low on the list of concerns of fixed-interest investors. A minority (27%) expects a reverse yield curve within three years; almost half (45%) foresee contrast the persistence of a flat yield curve. One in three (34%) is concerned about rising inflation.

Invesco also asked investors whether they expect a market correction. 44% of the respondents think we are heading for a ’significant’ correction, 28% disagree. More than one in three (37%) anticipates a crash on the stock markets within twelve months, 34% consider a crash on the bond markets as the largest tail risk.

American investors are significantly more pessimistic: nearly six out of ten expect a significant market correction, 56% are worried about inflation and almost half (48%) are concerned that central banks are raising interest rates too quickly. More than half of the US respondents also expect that the current economic expansion will end within a year – European investors by contrast see the phase of economic expansion continuing for another one to two years.

Nick Tolchard, Head of Europe, the Middle East & Africa (EMEA) for Invesco Fixed Income commented

“The U.S. political situation has likely contributed to the pessimistic outlook of North American fixed-income investors. Elevated rhetoric from the Trump administration regarding trade with China, Europe, Canada, and Mexico, plus the introduction of tariffs, have had a significant impact on optimism. From a political and market perspective, perceptions that the Fed has remained determined not to provide further policy support, and speculation about the potential for the yield curve to invert, have added to concerns.”

Invesco also asked the bond investors for their view on China, whose importance in international bond indices is on the rise. In Europe, 40% of respondents have exposure to the country, while in North America it is even lower. Western investors are well behind those in Asia, where nearly 70% of fixed-income investors are invested in China. In the EMEA region, one in ten investors wants to increase the weight of Chinese bonds over the next three years. This figure is in stark contrast to North America, where nearly 60% of the respondents want to invest more in Chinese bonds.

The planned expansion aside, China’s weight in the average bond portfolio is still low: an average of 5% for an institutional portfolio. Investors see different obstacles and are particularly afraid of higher risks and government intervention (such as capital restrictions). Nevertheless, nearly two out of three respondents are of the opinion that China is currently underrepresented in international bond portfolios.

Invesco’s Global Fixed Income Study also focuses extensively on LDI (liability-driven investing) and sustainable investing.