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For many years, global issuers have gravitated toward the U.S. dollar bond market, drawn by its unparalleled liquidity, vast investor base and efficient access to funding. However, recent developments in the U.S. yield environment are beginning to shift perspectives on the U.S. Treasury market’s long-held reputation as the world financial safe haven. In response, market participants are increasingly turning to other regions, including the euro and sterling bond markets, which are gaining traction as alternatives for market participants seeking stability and value in today’s shifting landscape.

The euro-denominated government and corporate bond markets, anchored by the relative stability and scale of the eurozone, continue to offer robust liquidity and diversification opportunities. Similarly, the U.K.’s sterling bond market, supported by its long-standing reputation for transparency and regulatory strength, is drawing renewed interest amid global volatility. This is due to the relative value and resilience found within these European markets, with both GBP and EUR bonds providing options for those seeking to navigate the evolving global fixed income landscape. This shift in focus underscores the growing importance of European currencies in global portfolios, as market participants seek to balance risk and performance in an environment marked by fiscal uncertainty in the U.S.

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During the period from April 1, 2025, to Aug. 28, 2025, U.S. Treasuries (as represented by the iBoxx $ Treasuries) saw a modest performance, posting a return of 1.13%. In comparison, the iBoxx Global Government EMEA Index, which represents sovereign bond issues by central governments in the EMEA, recorded a gain of 1.66% for the same timeframe (see Exhibit 1), in USD-hedged terms. Individual sovereign indices covering German, French, Italian and British sovereign bonds also registered positive performance in USD-hedged terms. The iBoxx Global Government Italy rose by 2.04%, while the iBoxx Global Government Germany increased by 0.35% when compared to U.S. Treasuries.

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Performance dynamics shift when accounting for the EUR-USD and GBP-USD exchange rates, as reflected in USD unhedged indices. Over the period, the iBoxx Global Government EMEA index outperformed the iBoxx $ Treasuries by 7.82% (see Exhibit 2). Additionally, when examining individual sovereign markets in USD unhedged terms, several of them posted notably higher returns compared to U.S. Treasuries. German sovereign bonds increased 7.29%, while Italian sovereign bonds gained 9.20% over the same period.

Shifting Correlations and Improved Diversification

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The correlation data highlights a notable divergence between six-month (April 2025-August 2025) and 10-year relationships among U.S. Treasuries and major European sovereign bond markets. Over the April 2025-August 2025 period, correlations with U.S. Treasuries were significantly lower than their respective 10-year averages. For example, Germany and France, which both show strong 10-year correlations of 89% with U.S. Treasuries, had much weaker short-term correlations of 37% and 36%, respectively. Italy and the U.K. also display this pattern, with 10-year correlations of 74% and 76% that dropped to 45% and 31% in the recent period, respectively. The broader EMEA index follows suit, with a 10-year correlation of 62% but only 44% for the six-month period. This suggests that while U.S. and European government bonds had historically moved closely together, recent market conditions have led to greater differentiation and reduced co-movement, reflecting shifting investor sentiment and regional economic factors.

If sustained, the recent decline in correlation between U.S. Treasuries and European sovereign bonds highlights the potential for new diversification opportunities. Strong unhedged returns in EUR and GBP markets, especially Italian and German bonds, suggest growing investor interest. If U.S. fiscal uncertainty persists, European bonds might be an interesting alternative for investors looking for global diversification.

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