Goldman Sachs has upgraded its outlook for equities and 10-year government bonds, citing improving return prospects for sovereign debt following a rise in yields, according to a report by the Financial Times. 

The bank's asset allocation team, led by Christian Mueller-Glissmann, raised its three-month equity allocation from neutral to overweight, reversing a position maintained over recent months. 

Goldman also upgraded its 12-month outlook for 10-year government bonds from neutral to overweight, bringing its longer-term allocation in line with equities. 

The shift follows a rise of approximately one percentage point in government bond yields since the start of the year, improving potential returns for investors holding sovereign debt. 

Goldman said higher yields, improved return asymmetry and expectations of lower inflation could support a return to more conventional bond allocations within diversified portfolios. 

However, the bank maintained a neutral stance on government bonds over its three-month investment horizon, citing continued risks from fiscal pressures, inflation uncertainty and competition for capital linked to AI-related investment. 

The strategists expect government bonds to gradually regain their role as a portfolio hedge, although near-term volatility and the prospect of further yield increases remain concerns. 

Goldman was less optimistic about corporate credit, downgrading its three-month outlook to underweight, in line with its existing 12-month position. 

The bank cited widening corporate credit spreads and a repricing of sovereign risk in the euro area as factors weighing on the asset class. 

The changes reflect a more favourable medium-term outlook for government debt, while maintaining caution towards credit markets as higher borrowing costs and increased debt issuance put pressure on valuations.