A growing number of fund managers are turning to European bonds as a safe haven, driven by increasingly complex and difficult-to-price global macro risks. UBS Asset Management and Guinness Global Investors have recently been increasing their holdings of German government bonds, while Barings has reduced its exposure to US Treasuries to reallocate capital into bonds from Italy, Spain, and France. Aviva Investors has also indicated that a overweight position in eurozone bonds appears attractive.
Brian Mangwiro, a portfolio manager at Barings, stated, "There is sound logic in reducing allocations to US and UK government bonds in favor of European assets. If you are seeking a more stable institutional and political environment, while facing a landscape of low growth and low inflation, Europe is a logical destination."
Why US Treasuries Are Losing Their Appeal
The allure of US Treasuries is fading amid growing doubts about the market's confidence in Federal Reserve Chairman Kevin Warsh's ability to combat inflation. Meanwhile, investors are waiting for the next UK budget to assess government spending plans. Japanese government bonds remain under pressure as yields have surged to multi-decade highs, with any currency intervention likely offering only temporary relief. Although eurozone bonds have also been caught in a global sell-off due to the Iran war and the resulting energy crisis, some investors believe the outlook for fiscal and monetary policy in Europe is more predictable than in the US, UK, or Japan, and that this is already more fully reflected in market pricing.
A 10-year Japanese government bond auction on Tuesday saw its weakest demand since May 2025. Last week, the yield on the 30-year US Treasury rose to its highest level since 2007, underperforming German bonds, with the yield spread between the two widening to its largest of the year.
The Influence of Oil Prices and Structural Pressures
Crude oil has been a primary driver of the repricing of interest rates this year, still up roughly 15% since late February. However, other factors are also making investors more cautious about holding long-term bonds. Fiscal pressures from rising defense spending and an aging population are mounting, while geopolitical instability, climate change, and trade barriers could keep inflation elevated. The path for US Treasuries has become unclear due to ambiguity over how the Fed intends to restore price stability. The Fed held rates steady last week, and Chairman Warsh's vague stance on key issues has raised doubts about his commitment to returning inflation to the 2% target. Adding to the uncertainty, reports last Friday indicated Warsh is considering reducing the frequency of policy meetings. In the UK, investors are remaining cautious until Prime Minister Andy Burnham delivers his first budget on October 28. His government faces significant challenges in funding military expenditures and adult social care. The 30-year UK gilt yield is already the highest among developed markets.
Europe: A Haven of Relative Predictability
Europe also faces fiscal pressures and is continuously impacted by energy price volatility stemming from the Middle East conflict. Nevertheless, some investors believe the European Central Bank (ECB) will act more decisively in response to shocks compared to its peers. Craig Veysey, a portfolio manager at Guinness Global Investors, noted, "The ECB has a tendency to control inflation more aggressively, even at the expense of potential growth, and weaker economic growth is beneficial for bonds." Swap market data shows traders are pricing in a 25-basis-point rate hike by the ECB this year, with a greater than 60% probability of a second increase. The market's tightening expectations for the ECB are slightly higher than for the Fed or the Bank of England.
Mild Inflation Creates a Window for German Bonds
Kevin Zhao, head of Global Sovereign Fixed Income and FX at UBS Asset Management, stated that the market's tightening expectations for Europe are overdone, and the yield on the 10-year German bund breaking above 3% last month provided a good buying opportunity. "Europe does not have an inflation problem, which is a stark contrast to the UK and the US. In the long term, Europe is a region of low growth and low inflation, but it has a highly credible independent central bank," he added. Last week, money markets were pricing in 70 basis points of rate hikes by the ECB by mid-next year. Aviva Investors believes this move is excessive and consequently finds the eurozone bond's overweight position attractive.
Divergent Paths Within Europe: Cautious on Italy, Favorable on France
However, this is far from a simple flight to safety—significant differences in borrowing needs and political risk across European countries pose a critical challenge for investors once they decide to choose Europe over other markets. Kim Crawford of J.P. Morgan Asset Management has reduced exposure to long-term Italian government bonds, citing risks from the September budget negotiations due to cracks in Prime Minister Georgia Meloni's governing coalition. She instead sees an opportunity in French government bonds, whose 10-year yield is nearly 80 basis points higher than their German equivalent. Crawford remarked, "Europe is attractive, though the upside is less than in the UK. European policy is already in a neutral zone, while the UK remains in a tightening phase."
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