The Shifting Sands of Global Bond Markets: Why European Debt is Gaining Ground Over U.S. Treasuries

The global bond market is undergoing a seismic shift. Foreign demand for U.S. Treasuries has been steadily declining, driven by Trump's fiscal policies, geopolitical tensions, and the rise of European debt as a safer haven. This trend, rooted in structural shifts and policy missteps, poses both risks and opportunities for investors.

The Decline of U.S. Treasury Dominance

Foreign ownership of U.S. Treasuries has fallen from 50% in 2015 to just 30% today, with domestic buyers like commercial banks now holding 55% of the market. This structural shift reflects a loss of confidence among foreign investors, exacerbated by Trump's trade policies and legislative overreach.

Take the April 2025 tariff announcement, which triggered a “Sell America” selloff, pushing U.S. stocks, bonds, and the dollar lower. Such volatility mirrors past crises—like the 2022 UK mini-budget turmoil—exposing the fragility of Treasuries as a safe haven. Meanwhile, Section 899 of Trump's budget bill, which threatens a 5–25% withholding tax on income from U.S. assets for investors from “discriminatory” countries, has further deterred foreign capital.

The Rise of European Debt

As U.S. fiscal credibility wanes, European bonds are emerging as a viable alternative. The euro has strengthened against the dollar amid U.S. policy unpredictability, while the EU's more stable fiscal framework has bolstered confidence. European government bonds now offer comparable yields to Treasuries, with added geopolitical insulation.

For instance, Germany's 10-year bond yields have outperformed U.S. Treasuries of the same maturity for much of 2025, reflecting investor trust in the eurozone's economic integration. Additionally, the EU's regulatory environment—less prone to weaponization than U.S. markets—makes its debt instruments more appealing to institutional investors.

Risks and Tail Scenarios

While Treasuries remain the largest and most liquid market, structural weaknesses loom. Persistent U.S. budget deficits could force higher yields on long-term Treasuries, undermining their safe-haven status. A “tail risk” scenario—where markets demand materially higher yields to compensate for fiscal risks—could destabilize the long end of the curve.

Regulatory reforms, such as the Fed's efforts to improve Treasury market liquidity, aim to mitigate these risks. However, the weaponization of capital flows under Section 899 poses a deeper threat, potentially accelerating the shift of capital toward European markets.

Investment Strategy: Navigating the New Landscape

1. Diversify into European Debt: Allocate to core European government bonds (e.g., Germany, France) and consider peripheral issuers with improved fundamentals (e.g., Spain, Italy).
2. Hedge Against Dollar Weakness: Use currency-hedged ETFs or futures to protect against further declines in the dollar.
3. Be Selective with U.S. Treasuries: Focus on short- to medium-term maturities, as long-term yields may face upward pressure. Avoid Treasuries with maturities over 10 years unless yields rise meaningfully.
4. Monitor Fiscal Policy: Track developments around Section 899 and U.S. deficit trends. A resolution of these issues could stabilize flows, but the risk of escalation remains high.

Conclusion

The era of U.S. Treasury dominance is fading. Geopolitical tensions, policy missteps, and the rise of European markets are reshaping global bond dynamics. Investors must adapt by diversifying into European debt and hedging against dollar risks. Those who ignore this shift risk being left behind in a market where safe havens are no longer synonymous with American assets.

As the tides turn, the question is no longer whether European bonds will rival Treasuries, but how quickly—and how far—the shift will go.

Data sources: U.S. Treasury TIC System, European Central Bank, Congressional Research Service.