Following a prolonged period of zero and negative interest rates, fixed-income securities are staging a remarkable comeback. For the first time since the outbreak of the financial crisis in 2007 and 2008, top-rated sovereign bonds are once again offering notable returns. US paper in particular exhibits noticeably higher interest rates: the annual yield on ten-year US Treasuries stands at around 5.2 per cent, whilst bonds with a maturity of 30 years reach almost 5.6 per cent. However, these returns presuppose that the bonds are held until maturity and that the issuer remains solvent.
Sovereign debt and yield spreads in European comparison
The higher yields also reflect the grown debt ratios of industrialised nations. The United States now has a debt ratio of around 127 per cent of gross domestic product, representing liabilities of around four trillion dollars. Because the US Federal Reserve has established an interest rate level that is more than one percentage point above the European level, the US pays higher interest rates than European nations. Across the 21 eurozone countries, the average ratio stands at just under 90 per cent of gross domestic product, with Germany possessing a comparatively solid foundation at around 65 per cent.
- —Germany: debt ratio of around 65 per cent of GDP, ten-year bond yield at 3.4 per cent
- —France: debt ratio of 118 per cent of GDP, ten-year bond yield at around 4.8 per cent
- —Italy: debt ratio of 138 per cent of GDP, ten-year bond yield at 4.5 per cent
- —Greece: debt ratio of 142 per cent of GDP, ten-year bond yield at 4.3 per cent
Higher sovereign debt forces governments to issue new bonds with higher coupons in order to attract sufficient capital. This interest burden further restricts financial room for manoeuvre and can trigger a debt spiral. Political instability reinforces this effect: minority governments such as in France, which face challenges in passing constitutionally compliant budgets, must convince investors with noticeable yield premia.
Currency risks and inflationary pressure
For European investors, exposures to the US dollar carry additional risks. Following the inauguration of US President Donald Trump in January 2025, the dollar noticeably lost ground. While the exchange rate was previously between 1.06 and 1.10 dollars per euro, it subsequently traded in the range of 1.15 to 1.17 dollars per euro. Such a depreciation of five to six per cent almost entirely erodes the nominal yield advantage of US paper upon conversion back into euros. Hedging against exchange rate fluctuations is based on the interest rate differential between the two currency areas and reduces the return to the level of sound euro securities.
In addition, persistent inflation exerts a decisive influence on the bond markets. High inflation rates prompted the US Federal Reserve to raise interest rates in September, which had a direct impact on bond yields. Rising interest rates weigh on the prices of already issued paper: anyone forced to sell before maturity realises corresponding price losses.
