The halo of U.S. treasury bonds is fading! Global funds are shifting to European bonds, with German bonds becoming the new favorite for safe-haven investing.

As global macro risks become increasingly complex and harder to price, European bonds are gradually emerging as a safe choice in the eyes of fund managers. UBS Asset Management and Guinness Global Investors have recently been increasing their holdings in German government bonds, while Barings has reduced its exposure to U.S. Treasuries, reallocating funds to Italian, Spanish, and French bonds. Aviva Investors has also stated that the overweight position in Eurozone bonds is quite attractive. Brian Mangwiro, an investment manager at Barings, said, Reducing allocations to U.S. Treasuries and U.K. bonds and shifting towards European assets makes perfect sense. If one seeks a more stable institutional and political environment, while facing a low growth, low inflation scenario, Europe is a reasonable destination. The allure of U.S. Treasuries is fading, with rising political and policy uncertainties. U.S. Treasuries are gradually losing their charm, as market skepticism towards Federal Reserve Chairman Kevin Warsh's credibility in combating inflation grows. Meanwhile, investors are awaiting the U.K.'s next budget report to evaluate government spending plans; Japanese government bonds remain under pressure due to skyrocketing yields at multi-decade highs, with currency intervention measures likely providing only temporary relief. Although Eurozone bonds have also been impacted by the global sell-off triggered by the Iran war and the resulting energy crisis, some investors believe that the outlook for European fiscal and monetary policy is more predictable compared to the U.S., U.K., and Japan, and has been more adequately reflected in market pricing. The auction of 10-year Japanese government bonds on Tuesday met the weakest demand since May 2025. Last week, the yield on 30-year U.S. Treasuries climbed to its highest level since 2007, underperforming German government bonds, leading to the widest spread between the two this year. Transmission of oil prices and structural pressures Crude oil has been a major driver of interest rate repricing this year, having gained about 15% since the end of February. However, other factors are making investors increasingly cautious about holding long-term bonds. Increased defense spending and the financial pressures from an aging population continue to weigh heavily, while geopolitical turmoil, climate change, and trade barriers may keep inflation elevated. The path for U.S. Treasuries has become murky due to the Federal Reserve's intentions on restoring price stability. The Fed held interest rates steady last week, and Warsh's vague comments on key issues have raised doubts about his commitment to returning inflation to the 2% target. Compounding matters, reports last Friday indicated that Warsh is considering reducing the frequency of policy meetings. In the U.K., investors remain cautious ahead of Prime Minister Andy Burnham's first budget announcement on October 28. His government faces significant challenges in funding military expenditure and adult social care. The yield on 30-year U.K. government bonds is already among the highest in developed markets. Europe: Relative certainty and allocation value Europe is also under fiscal pressure and continuously affected by energy price fluctuations resulting from conflicts in the Middle East. However, some investors believe that the European Central Bank's responses to shocks will be more decisive than those of its counterparts. Craig Veysey, a portfolio manager at Guinness Global Investors, noted, The European Central Bank tends to control inflation more aggressively at the expense of potential growth, and weaker economic growth is beneficial for bonds. Swap market data shows that traders are betting on a 25 basis point rate hike by the ECB this year, with more than a 60% chance of another increase expected. Market expectations for ECB tightening are slightly higher than those for the Federal Reserve or the Bank of England. Mild inflation reveals a window for German bond allocation Kevin Zhao, global head of sovereign fixed income and currencies at UBS Asset Management, stated that market expectations for ECB tightening are excessive, and the recent breach of 3% in the yield on 10-year German government bonds offers a good buying opportunity. He pointed out, There is no inflation problem in Europe, which is entirely different from the U.K. and the U.S. In the long run, Europe is characterized by low growth and low inflation but has a highly credible independent central bank. Last week, money market pricing indicated that the ECB would raise rates by 70 basis points by mid-next year. Aviva Investors believes this trend is overstated and points out that the overweight position in Eurozone bonds is therefore attractive. Regional differences: Cautious on Italian bonds, favoring French bonds However, this is far from a simple safe-haven tradeborrowing demand and political risks vary significantly across European countries. Once investors choose Europe over other markets, selecting which country to invest in becomes a key challenge. Kim Crawford of J.P. Morgan Asset Management has reduced her exposure to long-term Italian bonds, believing that the September budget negotiations pose risks due to cracks appearing in Prime Minister Georgia Meloni's ruling coalition. Instead, she considers French bonds to be an entry point, as their 10-year bond yields are nearly 80 basis points higher than their German counterparts. Crawford stated, Europe is attractive, although the upside potential is less than in the U.K. European policy is already in a neutral range, while the U.K. is still in a tightening range.