Euro-denominated Bonds: A Viable Alternative for US Dollar-Based Investors

US dollar-based bond investors should consider euro-denominated bonds as a viable alternative due to rising US deficits and debt, as well as less predictable policy. This shift in investment strategy can provide investors with a more stable and secure investment option.

As US deficits and debt continue to rise, coupled with less predictable policy, US dollar-based bond investors are reassessing their allocations. The euro, the second-largest currency in central bank reserves, presents a compelling alternative. European bond markets, with their high quality and depth, offer a diversified investment option.

The euro has appreciated by 11% against the US dollar this year, with interest rates in Europe expected to fall further. This trend could continue, making unhedged positions in euro bonds attractive. Alternatively, hedged positions can enhance yields by almost 2.5% due to the gap between short-term euro and USD rates. European corporate credit also looks attractive, with strong balance sheets and healthy margins supporting the sector.

ING Groep's recent announcement of Euro-denominated Tier 2 bonds with a 12-year maturity and 7-year call option further illustrates the growing interest in European bonds. Meanwhile, HDB Financial Services plans to issue over 5 billion rupees in bonds maturing in three years and 40 days, highlighting the robust demand for euro-denominated instruments.

Investors should consider a modest reallocation of their US dollar-based bond allocations to euro fixed-income. This shift can provide a more stable and secure investment option, potentially improving risk-adjusted returns. A European core plus strategy, combining rates and credit exposure, can help diversify sources of income and differentiate yield contribution.

References:
[1] https://seekingalpha.com/article/4813503-us-dollar-based-bond-investors-should-look-europe
[2] https://www.investing.com/news/company-news/ing-groep-to-launch-eur-tier-2-bonds-with-stabilization-measures-93CH-4187365
[3] https://www.tradingview.com/news/reuters.com,2025:newsml_L4N3U408S:0-hdb-financial-to-issue-over-3-year-bonds-bankers-say/