Bond Funds Turn to Europe as Global Risks Become Harder to Price

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(Bloomberg) — European bonds are emerging as a safer choice for fund managers as they try to navigate an increasingly fraught global backdrop. 

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UBS Asset Management and Guinness Global Investors have been buying German bonds, Barings sold US Treasuries to boost exposure to Italy, Spain and France, and Aviva Investors say overweight positions in the euro area look attractive. 

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“There is a strong case for reducing your Treasury allocation, reducing your gilt allocations, and moving into Europe,” said Brian Mangwiro, an investment manager at Barings. “If you’re seeking more of a stable institutional and political environment, low growth and inflation, then you end up in Europe.”

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US Treasuries are falling out of favor as the inflation-fighting credibility of Federal Reserve Chairman Kevin Warsh is called into question. Meanwhile, investors are waiting to see the UK’s next budget to get a better idea of the country’s spending plans, and Japanese bonds are being hit by volatility as yields soar to multi-decade highs. Intervention to prop up the yen may only bring temporary relief.

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While euro area debt has been hit by the global selloff triggered by the Iran war and the energy crisis it unleashed, some investors say the outlook for fiscal and monetary policy is more predictable than in the US, UK and Japan, and better reflected in market pricing. Japan’s 10-year government bond auction Tuesday drew its weakest demand since May 2025.

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Yields on 30-year Treasuries climbed to their highest since 2007 last week, underperforming German debt. The spread between them hit its widest point in a year. 

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Oil has been the primary trigger for rate re-pricing this year, and remains about 15% up since late February, but other factors are making investors nervous about holding longer-dated bonds. Increased spending on defense and caring for ageing populations is piling pressure on government finances, while geopolitical turmoil, climate change and trade barriers could keep inflation elevated.

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The path for Treasuries has been clouded by questions over how the Fed intends to restore price stability. It left rates unchanged last week, and Warsh’s ambiguity on key issues has raised doubts about his commitment to returning inflation to the 2% target. Adding to the angst: the New York Times reported Friday that he’s considering reducing the frequency of policy meetings. 

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In the UK, investors are likely to remain cautious at least until Prime Minister Andy Burnham’s tax and spending plans are detailed in his administration’s first budget on Oct. 28. He faces big questions about how to fund rising military investment and adult social care. Yields on 30-year gilts are already the highest in developed markets.