Euro-Denominated Debt Offers Attractive Yields Amid Dollar Stability and Euro Undervaluation

The global capital markets are at a crossroads, with investors increasingly turning their attention to euro-denominated debt as a compelling alternative to dollar assets. While U.S. Treasuries remain a cornerstone of fixed-income portfolios, the combination of widening yield differentials, a structurally undervalued euro, and emerging digital infrastructure is creating a unique window for strategic capital allocation.

Yield Divergence: Eurozone Bonds Outperform U.S. Treasuries

Germany's 10-year Bund yield currently stands at 2.69% as of November 25, 2025, with analysts forecasting a slight decline to 2.67% by the end of the quarter. This contrasts sharply with U.S. 10-year Treasury yields, which held steady at 4.117% as of November 19, 2025. The 143-basis-point spread between the two benchmarks represents one of the most attractive yield differentials in recent memory.

Meanwhile, Eurozone inflation has eased to 2.1% year-on-year in October 2025, with core inflation stabilizing at 2.4%. This moderation, coupled with the European Central Bank's (ECB) cautious stance-President Christine Lagarde has emphasized flexibility in adjusting policy if inflation deviates from the 2% target-suggests a more accommodative environment for euro-denominated debt. According to ECB commentary, the central bank has maintained a flexible approach to policy adjustments. By contrast, U.S. inflation remains stubbornly higher, with the Federal Reserve signaling a potential rate cut in December 2025 but maintaining a higher-for-longer policy stance.

Euro Undervaluation: A Structural Tailwind for Arbitrage

The euro's undervaluation against the dollar has become a focal point for macro investors. As of November 2025, the EUR/USD exchange rate hovers near 1.1500, with technical indicators like the RSI and moving averages reinforcing a bearish bias. The euro's weakness is further supported by structural factors: the Templeton Global Bond Fund has labeled the dollar "overvalued" against the euro, citing cyclical imbalances and shifts in global capital flows.

This undervaluation creates a natural arbitrage opportunity. Investors can lock in higher U.S. yields while hedging against a weaker euro, or alternatively, take directional bets on the euro's eventual re-rating. The latter strategy gains traction given the European Commission's upgraded growth outlook-upgraded to 1.3% for 2025-and a surge in exports to the U.S.

Strategic Allocation: Beyond Traditional Bonds

The appeal of euro-denominated assets extends beyond government bonds. Private-sector innovation, such as the EURAU euro stablecoin launched by AllUnity and Privy, is democratizing access to euro-based liquidity. This stablecoin enables real-time transactions and programmable treasury tools, addressing a critical gap in European fintech infrastructure. As the EU prepares to enforce MiCAR (Markets in Crypto-Assets Regulation) in 2026, EURAU and similar instruments could attract institutional capital seeking regulated, high-liquidity euro assets.

For capital allocators, this ecosystem offers a dual benefit: exposure to traditional euro debt with its attractive yields, plus access to a nascent digital asset layer that enhances capital efficiency. The EURAU stablecoin's integration into mainstream payment systems also mitigates currency risk, making it a versatile tool for cross-border arbitrage.

Risks and Considerations

While the case for euro-denominated debt is compelling, investors must remain mindful of macroeconomic headwinds. Eurozone services inflation remains elevated at 3.4%, and geopolitical tensions-such as energy price volatility-could reignite inflationary pressures. Additionally, the Fed's higher-for-longer policy, driven by Trump-era fiscal stimulus, could delay the dollar's correction.

However, these risks are balanced by the ECB's demonstrated willingness to adjust rates in response to economic data. The central bank's flexibility, combined with the euro's undervaluation, suggests a favorable risk-reward profile for investors willing to hold euro assets over the medium term.

Conclusion

Euro-denominated debt is emerging as a cornerstone of a diversified capital allocation strategy. The combination of attractive yields, structural undervaluation, and digital innovation creates a multi-layered opportunity for investors. As the Fed's rate-cut cycle looms and the ECB maintains a balanced approach to inflation, the euro's re-rating appears inevitable. For those with the patience to navigate short-term volatility, the rewards could be substantial.