For the first time since the outbreak of the financial crisis in 2007 and 2008, fixed-income securities are once again offering tangible yields. Following a prolonged phase of zero and negative interest rates, even government bonds from high-credit-rating issuers in the investment-grade segment are seeing rising coupons again. Striking interest rate levels are particularly evident in the US at first glance: ten-year US Treasury bonds yield around 5.2 per cent, while thirty-year paper reaches almost 5.6 per cent, provided the securities are held to maturity and the issuer services its liabilities.
Budget deficits and coupon spreads in the eurozone
With rising interest rates, however, risks for bond portfolios are growing. If market interest rate levels climb further, prices of existing bonds come under pressure because newly issued securities are more profitable. Those forced to sell early may realise capital losses. Alongside inflation concerns and geopolitical conflicts, growing sovereign debt in particular is taking centre stage in risk assessments.
Debt ratios of industrialised nations have risen markedly in recent years. The US is roughly four trillion dollars in debt, corresponding to a debt ratio of around 127 per cent of gross domestic product. By comparison, Germany has a ratio of around 65 per cent. The average across the 21 eurozone countries stands at almost 90 per cent, with individual countries significantly higher.
- —Germany issues ten-year federal bonds with a coupon of 3.4 per cent.
- —Greece shows an interest rate of 4.3 per cent with a debt ratio of 142 per cent.
- —Italy pays 4.5 per cent interest with debt at 138 per cent of gross domestic product.
- —France offers ten-year coupons of around 4.8 per cent with a ratio of 118 per cent.
The need for higher yields affects in particular countries with unstable political majorities. Minority governments such as in France, which face obstacles in passing constitutionally compliant budgets, must attract investors with risk premiums. Growing issuance to cover budget deficits increases interest rate risk and narrows future fiscal leeway.
Exchange rate volatility and the influence of monetary policy
For investors in the euro currency area, the higher US yields are put into perspective by exchange rate risk. With US President Donald Trump taking office in January 2025, the US dollar weakened: while the exchange rate had previously stood between 1.06 and 1.10 dollars per euro, it subsequently rose to 1.15 to 1.17 dollars. A currency loss of five to six per cent erodes the yield advantage of US securities when converted back into euros. Currency hedging largely neutralises this effect, as its costs are based on the interest rate differential between the two currency zones, thereby bringing the net yield back to the level of solid euro paper. In addition, stubborn inflation prompted the US Federal Reserve to implement an initial interest rate hike in September, which had an immediate impact on the yield structure.
