The aura of US debt has faded! Global capital is shifting to European bonds, and German bonds have become a new safe-haven favorite

The Zhitong Finance App learned that as global macro risks become more complex and difficult to price, Eurobonds are gradually becoming a safe choice in the eyes of fund managers. UBS Asset Management (UBS Asset Management) and Guinness Global Investors (Guinness Global Investors) have continued to increase their holdings of German treasury bonds recently; Barings (Barings) has reduced its holdings of US treasury bonds and transferred capital to Italian, Spanish and French bonds; Aviva Investors (Aviva Investors) also said that oversized positions on Eurozone bonds are very attractive.

Barings Investment Manager Brian Mangwiro (Brian Mangwiro) said, “There is sufficient logical support for reducing the allocation of US Treasury bonds and British Treasury bonds and shifting to European assets. If we seek a more stable institutional and political environment while facing a pattern of low growth and low inflation, Europe is a reasonable destination.”

The aura of US debt is fading, and political and policy uncertainty heats up

US Treasury bonds are gradually falling out of favor, and the market is increasingly questioning the credibility of Federal Reserve Chairman Kevin Warsh (Kevin Warsh) against inflation. Meanwhile, investors are waiting for Britain's next budget to evaluate government spending plans; Japanese treasury bonds continue to be under pressure as yields soar to decades-high levels, and exchange rate intervention measures may only provide a brief resurgence.

Although Eurozone bonds were also impacted by the global sell-off caused by the Iran war and the resulting energy crisis, some investors believe that Europe's fiscal and monetary policy prospects are more predictable than those of the US, the UK, and Japan, and are more fully reflected in market pricing. Japan's 10-year treasury bond auction held on Tuesday experienced the weakest demand since May 2025.

Last week, the yield on 30-year US Treasury bonds climbed to the highest level since 2007. The performance was lower than that of German treasury bonds, and the interest rate spread between the two widest during the year.

The transmission and structural pressure of oil prices

Crude oil is the main driver of interest rate repricing this year, with a cumulative increase of about 15% since the end of February. However, other factors have also made investors more wary of holding long-term bonds. Fiscal pressure from rising defense spending and an aging population continues to increase, while factors such as geopolitical turmoil, climate change, and trade barriers are likely to keep inflation high.

The path of US debt has been blurred by how the Federal Reserve intends to restore price stability. The Federal Reserve kept interest rates unchanged last week, and Walsh's vague statements on key issues raised doubts about the market's determination to return inflation to the 2% target. To make matters worse, it was reported on Friday that Walsh was considering reducing the frequency of policy meetings.

In the UK, investors remained cautious at least until Prime Minister Andy Burnham (Andy Burnham) unveiled his first budget on October 28. Its government faces major challenges in how to finance military spending and adult social care. The yield on 30-year UK Treasury bonds is already among the highest in developed markets.

Europe: Relative Certainty and Allocation Value

Europe is also facing financial pressure and continues to be affected by fluctuations in energy prices caused by the Middle East conflict. However, some investors believe that the ECB's response to the shock will be more decisive than its peers.

Craig Veysey (Craig Veysey), portfolio manager at Guinness Global Investors, said: “The ECB tends to be more aggressive in controlling inflation at the cost of potential growth, while weak economic growth is beneficial to bonds.” According to swap market data, traders are betting that the ECB will raise interest rates by 25 basis points this year, and expect more than 60% chance of raising interest rates again. Market expectations for ECB tightening were slightly higher than those of the Federal Reserve or the Bank of England.

Inflation is moderate, and the German bond allocation window is showing

Kevin Zhao (Kevin Zhao), head of global sovereign fixed income and foreign exchange at UBS Asset Management, said that the market's expectations of European austerity were excessive, and German 10-year treasury yields surpassed 3% last month, providing a good buying opportunity. He pointed out, “There is no inflation problem in Europe; this is very different from the UK and the US. In the long run, Europe has low growth and low inflation, but it has a highly credible independent central bank.”

Last week, money market pricing indicated that the ECB would raise interest rates by 70 basis points by mid-next year. Aviva Investment sees this trend as excessive and points out that oversized positions on Eurozone bonds are therefore attractive.

Regional differences: Italian debt is cautious, legal debt is favored

However, this is far from a simple safe-haven deal — borrowing needs and political risks vary markedly among European countries. Once investors choose Europe over other markets, choosing a country to buy debt becomes a key challenge.

Kim Crawford (Kim Crawford) of J.P. Morgan Asset Management has cut her exposure to long-term Italian treasury bonds, believing that the September budget negotiations posed a risk due to a rift in Prime Minister Georgia Meloni (Georgia Meloni)'s ruling coalition. Instead, she believes that French treasury bonds have an opportunity to enter the market; the yield on 10-year treasury bonds is nearly 80 basis points higher than similar German bonds.

Crawford said, “Europe is attractive, although the upside is less than that of the United Kingdom. European policy is already in a neutral range, while the UK is still in an austerity zone.”