Relative Value in European and U.S. Sovereign Bonds: Bunds Remain Rich While Treasuries Hover in Wait-and-See Mode

The relative value of sovereign bonds in Europe and the United States has diverged sharply in late 2025, with German Bunds maintaining a premium over swaps despite structural headwinds, while U.S. Treasuries remain in a cautious equilibrium. This divergence raises critical questions for investors: Is the Bund's richness a reflection of deeper, structural imbalances in the eurozone, or a temporary correction amid shifting market dynamics? Meanwhile, U.S. Treasuries, despite benign economic data, show little directional momentum, suggesting a market in wait-and-see mode.

Bunds: Structural Richness or Corrective Repricing?

German 10-year Bund yields have stabilized near 2.7%, their highest level since early October 2025, despite a bleak economic outlook. The German Council of Economic Experts slashed its 2026 growth forecast to 0.9%, underscoring concerns over weak industrial output and financial stability risks. Yet, Bunds continue to trade 3 basis points above 10-year swap rates, a narrow but persistent premium. This richness appears rooted in structural factors rather than a mere market correction.

First, Germany's fiscal policy shift-marked by a relaxed debt brake and increased government spending-has eroded the traditional safety premium of Bunds. Second, the European Central Bank's (ECB) reduced purchases of sovereign debt have amplified market-driven pricing pressures, pushing yields higher. While political uncertainty in Germany has contributed to short-term volatility, the broader trend reflects a recalibration of risk perceptions in a eurozone grappling with aging demographics and energy transition costs.

Dutch pension fund flows further complicate the picture. Despite a €5.4 billion decline in Dutch institutional holdings, these entities repurchased €11.5 billion worth of Bunds, signaling a strategic reengagement. This dynamic suggests that while investors are wary of near-term risks, they remain anchored to Bunds as a core component of diversified portfolios.

U.S. Treasuries: Benign Data, Stale Yields

In contrast, U.S. 10-year Treasury yields have plateaued at 4.088%, leaving a 133.8 basis point spread over swaps. This wide differential reflects lingering demand for Treasuries as a safe-haven asset, yet recent market behavior indicates waning confidence. The spread between Treasuries and OIS rates has narrowed, a sign that investors are no longer pricing in aggressive rate cuts by the Federal Reserve.

The April 2025 U.S. tariff announcement, which triggered a 50-basis-point surge in Treasury yields-the third-largest weekly increase since 1986-highlighted the market's sensitivity to policy shifts. However, subsequent benign labor and inflation data have failed to catalyze further movement. This inertia suggests that Treasuries are in a holding pattern, awaiting clarity on the Federal Reserve's policy trajectory and the economic fallout from trade tensions.

IRS-OIS Widening and Strategic Positioning

The widening of the interest rate swap (IRS) minus OIS spread in Germany offers a critical clue. German Bunds now trade at a positive spread versus the swap curve a reversal from historical norms, reflecting a market pricing in higher risk premiums for sovereign debt amid fiscal loosening and ECB policy normalization. For investors, this signals a potential inflection point: Bunds may no longer offer the same "risk-free" appeal, but their structural richness could persist if the ECB continues to phase out quantitative easing.

Strategically, investors should differentiate between structural and corrective factors. In Europe, Bunds' richness is increasingly tied to fiscal and monetary policy shifts, making them a speculative bet on eurozone resilience. Conversely, U.S. Treasuries' wait-and-see stance reflects a market priced for stability but vulnerable to shocks from policy uncertainty or inflation surprises.

Dutch pension flows, meanwhile, underscore the importance of institutional demand in shaping bond valuations. While short-term losses in Bund holdings are evident, the repurchase activity suggests a long-term commitment to European government bonds. Investors should monitor these flows closely, as they may signal broader shifts in institutional risk appetite.

Conclusion

The relative value of Bunds and Treasuries in 2025 reveals divergent narratives. German Bunds, though rich by historical standards, are underpinned by structural fiscal and monetary shifts, while U.S. Treasuries remain in a cautious equilibrium, awaiting catalysts. For investors, the key lies in balancing exposure to these markets: hedging against Bunds' potential underperformance amid fiscal loosening while maintaining a watchful stance on Treasuries as policy uncertainties linger. As the ECB and Fed navigate their respective paths, the interplay between structural trends and market corrections will define the next chapter in sovereign bond investing.