The U.S. Treasuries’ halo fades! Global capital shifts to European bonds, with German bonds becoming the new safe haven

According to Zhitong Finance APP, as global macro risks become increasingly complex and difficult to price, European bonds are gradually emerging as the safe choice in the eyes of fund managers. UBS Asset Management and Guinness Global Investors have recently continued to increase their holdings of German government bonds; Barings has reduced its allocation to US Treasuries, redirecting funds toward Italian, Spanish, and French bonds; Aviva Investors also stated that the overweighting of eurozone bonds is highly attractive.

Barings investment manager Brian Mangwiro said: "Reducing exposure to US Treasuries and UK gilts and turning to European assets is fully justified. For those seeking a more stable institutional and political environment, while facing a backdrop of low growth and low inflation, Europe is a reasonable destination."

The Sheen of US Treasuries Fades, Political and Policy Uncertainties Intensify

US Treasuries are gradually falling out of favor, with market doubts mounting over Federal Reserve Chairman Kevin Warsh’s anti-inflation credibility. Meanwhile, investors are awaiting the next UK budget to assess government spending plans; Japanese government bonds remain under continuous pressure as yields surge to the highest in decades, and currency intervention may offer only brief reprieve.

Although eurozone bonds have also been hit by the global sell-off triggered by the Iran war and resulting energy crisis, some investors believe that Europe’s fiscal and monetary policy outlooks are more predictable compared to the US, UK, and Japan, with market prices already reflecting this more fully. On Tuesday, Japan’s 10-year government bond auction saw the weakest demand since May 2025.

Last week, the 30-year US Treasury yield climbed to its highest level since 2007, underperforming German bunds and widening the yield spread between the two to its broadest this year.

Oil Price Transmission and Structural Pressures

Crude oil has been the main driver of this year’s interest rate repricing, accumulating an increase of about 15% since the end of February. However, other factors are making investors more cautious about holding long-term bonds. Rising defense spending and fiscal pressure from aging populations persist, while geopolitical turmoil, climate change, and trade barriers could keep inflation elevated.

The path for US Treasuries has become unclear due to uncertainty over the Federal Reserve’s intent to restore price stability. The Fed kept rates unchanged last week, and Warsh’s ambiguous stance on key issues has led the market to question his resolve to restore inflation to the 2% target. To make matters worse, it was reported last Friday that Warsh is considering reducing the frequency of policy meetings.

In the UK, investors are maintaining caution at least until Prime Minister Andy Burnham announces his first budget on October 28. His government faces the significant challenge of finding funding for military spending and adult social care. The 30-year UK gilt yield is already the highest among developed markets.

Europe: Relative Certainty and Allocation Value

Europe also faces fiscal pressure and continues to be affected by energy price volatility resulting from Middle Eastern conflicts. Nevertheless, some investors believe the European Central Bank will respond to shocks more decisively than its peers.

Guinness Global Investors portfolio manager Craig Veysey remarked: "The European Central Bank tends to control inflation more forcefully, even at the cost of potential growth, and weaker economic growth benefits bonds." Swap markets show traders betting that the ECB will hike rates by 25 basis points this year, with more than a 60% probability of another increase. Expectations for ECB tightening are slightly higher than for the Federal Reserve or Bank of England.

Moderate Inflation, German Bund Buying Window Appears

Kevin Zhao, Global Head of Sovereign Fixed Income and FX at UBS Asset Management, commented that the market’s expectation for European tightening is excessive, and last month’s break above 3% in the German 10-year bund yield provided a good buying opportunity. He noted: “Europe does not have an inflation problem, which is in stark contrast to the UK and US. Over the long term, Europe means low growth, low inflation, but has a highly credible independent central bank.”

Last week, money markets priced in a 70 basis point ECB rate hike by mid-next year. Aviva Investors considers this move excessive, thus finding eurozone bond overweight positions attractive.

Regional Differences: Caution on Italian Debt, Favoring French Bonds

However, this is far from a simple safe-haven trade—borrowing needs and political risks among European countries vary significantly. Once investors choose Europe over other markets, country selection becomes the key challenge.

Kim Crawford of J.P. Morgan Asset Management has reduced exposure to long-term Italian bonds, seeing September’s budget negotiations as a risk due to cracks in Prime Minister Giorgia Meloni’s ruling coalition. Instead, she sees an entry opportunity in French bonds, with France’s 10-year yield nearly 80 basis points higher than its German equivalent.

Crawford said: "Europe remains attractive, even though the upside is less than the UK. European policy is already in neutral territory, while Britain remains in tightening mode."