Merrill Lynch Wealth Management is becoming “more worried” about the outlook for government bonds, a sector that has been concerning economists due to the weight of debt issuance and the potential threat of rising inflation.

“To date, we have been comfortable to hold underweight positions in all major government bond markets, with a view that the real damage is somewhat further in the future. This is based on the very wide spread that has already opened up between the yields on short-dated bonds relative to long bonds,” Bill O’Neill, portfolio strategist for Merrill Lynch Wealth Management, Europe, Middle East and Africa, said in a note.

“In credit markets, the picture is much calmer. Spreads movements have all but died down, and the market is now witnessing price action more akin to normality than crisis. This is a good thing. High grade credit is now returning to its former role, namely the source of some yield pick-up over government bonds, as opposed to an outright risk asset,” he said.

Concerns have been rising that a number of economies, including large ones such as that of the UK, for example, could be downgraded by rating agencies fearful about the sheer weight of public borrowing. Earlier in November, Fitch Ratings said the UK’s sovereign rating is most at risk among the top-rated nations. S&P has also issued a warning that the UK’s credit rating may be cut.

The sovereign debt rating of the US is also at risk, Fitch has said.

Merrill Lynch’s Mr O’Neill said inflation has returned as a focus of concern.

“Inflation was back in the spotlight last week, as the US, eurozone and UK all published higher October consumer price data than the previous month,” he said.

“Investors are now seeking hedges against economic disappointment or, conversely, sooner-than-expected rate hikes. Within equities, this has primarily been achieved by moving away from the high beta, cyclical sectors and into more defensive sectors such as consumer staples, which have been benefiting from recent mergers and acquisitions activity,” he added.