Update Bonds: European sovereigns in focus
Since the beginning of 2023, German ten-year yields have moved around their average of 2.4%, within a range of 2.1 to 3.0%. This is significantly higher than the yields during the covid crisis. The latest move up in yields (from 2.4% to 2.8%) at the end of February, was caused by the interpretation that German fiscal expansion would be imminently financed.
The German ten-year Bund yield appears to be moving to a higher space in the range (2.4% to 2.9%) and could test the technical 3% top. The German Financing Agency (DFA) confirmed that there will be no rush to increase funding volumes in anticipation of the expected issuance tsunami scheduled over the coming years. DFA will keep their current program for 2025 unchanged.
New challenges will come with the Trump tariffs on 2 April, when Trump would like to punish countries for their trading stance toward US goods. This could bring higher inflation and even the risk of stagflation for the US economy. If the US economy is impacted, the world could also be impacted.
France announced last week that their budget deficit for 2024 was narrower than expected. The shortfall provides some relief for France after setbacks on deficit reduction following the covid and inflation crises. France’s fiscal difficulties coincided with prolonged uncertainties on the political front, which led to a sell-off of French government bonds at the end of 2024. This gave the government a slightly better starting point to bring its deficit towards the European limit of 3% by 2029; but plenty of challenges remain and reforms will be necessary. France still has weak economic growth. President Macron has pledged to ramp up defence spending as part of ReArm Europe, but not as much as Germany.
We believe that European government yields are further converting into a common bond market, based on the theme of “whatever it takes.” It is not new that it is also driven by the discussion to start issuing Eurobonds (a programme introducing a combined financing pool for all European sovereigns). This could bring benefits similar to the most liquid US dollar and US Treasuries for international reserve investors. Moody’s has challenged the current status of US Treasuries being awarded the highest-quality credit-rating of AAA, given that US debt affordability is expected to worsen further. With interest payments accounting for 30% of revenue by 2035, US debt to GDP could end up at 130% by 2035 from nearly 100% in 2025. So it is not out of the question that Eurobonds could challenge US Treasuries at some point in the future as the ultimate safe haven.