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A roundup of the key themes in global government bond markets

US Treasuries have continued their volatile ride, as the market tries to navigate uncertain signals on the strength of the US economy and the impact of tariffs. While soft data indicators have shown weakened levels of confidence among consumers and businesses, the hard data confirm otherwise, with key economic metrics continuing to show healthy levels of growth and limited upward pressure on prices. Although the risk of weaker data materialising remains, so far, the impact of higher tariffs has been limited and the economic picture is still solid.

Ales Koutny, CFA
Head of International Rates,
Vanguard Investments Switzerland GmbH

The long end: A smaller part of a bigger picture

April’s weaker-than-expected 30-year US Treasury auction made headlines, with many suggesting it was a signal of the market’s unwillingness to absorb US long-term debt. The news roiled bond markets and raised fresh concerns about the impact on funding costs for government debt. However, it’s worth noting that long-dated bonds (20+ years or more) represent a very small part of global debt, accounting for less than 5% of total global government bond issuance. And in terms of their actual impact on government finances, the results of a long-end auction are negligible; they serve more as a barometer of investor confidence in the government’s fiscal position over the long term.

Strong momentum in Europe

Meanwhile, interest in European government bond markets is growing. The German government’s corporate tax cut has boosted optimism in Germany’s economy and driven up demand for German bunds. We expect this pro-growth momentum to continue.

Euro area periphery countries have also performed strongly. Countries such as Spain, Italy and Greece are benefitting from tighter fiscal controls, which have improved their credit ratings and boosted bond demand. Spreads on 10-year Italian bonds over German bunds have narrowed to around 90 basis points (bps), their lowest levels since 2021.

While periphery spreads have narrowed significantly, we still see value and expect further spread compression, driven by stronger European growth and investors reallocating flows out of the US and into European assets.

Currency considerations

The US administration cited Japan and Switzerland on its watchlist for unfair currency practices, but we don’t believe currency moves will play a formal role in ongoing trade negotiations. Yet currency interventions can raise volatility in government bond markets, as investors try to price in the longer-term impact of government actions.

In Switzerland, the Swiss National Bank (SNB) is grappling with the strength of the Swiss franc, which has appreciated significantly in recent months as some investors seek alternative ‘safe-haven’ assets to the US dollar. The SNB has decisively cut interest rates – but further cuts may complicate the central bank’s efforts to maintain low inflation, which has been trending downwards for the first time in four years.

Meanwhile, the Bank of Japan (BoJ) has been under pressure to stem further weakening in the yen. Long-end Japanese government bonds (JGBs) have seen significant volatility, but the BoJ remains cautious about raising rates that could disrupt Japan’s fragile economic recovery.

In a world where uncertainty can sometimes seem to be one of the only things that’s certain, we believe global government bonds continue to be a critical component of investors’ fixed income portfolios, blending risk mitigation and diversification properties at a time when investors need them most.

Biography

Ales Koutny as Head of International Rates is responsible for the portfolio management of global aggregate, governments and foreign exchange strategies.

Prior to joining Vanguard in 2023, Ales was a Global Macro Portfolio Manager at Janus Henderson, where he spent 8 years managing a range of global and unconstrained strategies. He started his career as an Analyst at JP Morgan Asset Management.

A CFA® charterholder, Ales also holds a M.Sc. in Data Science from City, University of London and a M.Sc. in Finance from Grenoble EM. He earned a B.A. (Hons) in Entrepreneurship from Manchester Metropolitan University.

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