- Is one of the world’s most important pricing signals entering a new era? Since 2015, the 10-year spread between US Treasury yields and Eurozone German Bunds has ranged between 100bps and 270bps. Since early 2025, pushed first by Germany's fiscal pivot and then by converging rate expectations (hawkish ECB vs Fed easing bias), the 10y US–Bund spread has narrowed by roughly 90bps. If this continues, the transatlantic spread could finally break through the lower trading range that has held for more than a decade.
- The latest bond sell-off suggests that the convergence trade has run its course: We expect a gradual reversal rather than a new tighter-for-longer regime. Over the last few weeks, the spread has stopped narrowing and rewidened to around 140bps. In the short run (next 6–12 months), the move should remain modest (+20bps) and still driven by rate expectations as markets reprice a less hawkish ECB against a Fed that stays on hold longer than consensus expects or even proceeds to hike.
- In the medium term (3–5 years), the transatlantic drivers will shift decisively from rate expectations to risk premia. We see the US neutral rate rising by 10–20bps on stronger AI-driven productivity gains while the Eurozone neutral rate drifts 10bps lower, consistent with a historical 20–50bps widening of the real-rate spread. On top of that, the US Treasury term premium looks underpriced relative to Bunds: the US convenience yield has flipped from -30bps to +20bps as Treasury supply erodes the safety premium, while the Bund retains a -40bps convenience yield anchored in collateral scarcity. The ECB's faster QT has already cheapened Bund duration by 35bps versus 10bps for Treasuries and we expect that gap to close. Adding a structural +10bps from the OIS/swap-spread channel, we see the spread widening by ~75bps to around 200bps.
- Ultimately, the transatlantic spread is evolving from a pure monetary-cycle gauge to a barometer of fiscal credibility and sovereign liquidity. For investors, this means the transatlantic spread should be monitored not only through the lens of rate differentials, but equally as a mirror of fiscal sustainability and sovereign market liquidity. For duration positioning, this means active positioning in Bunds versus US Treasuries not only in terms of rate expectations but also where the term premium repricing will be most pronounced (longer maturities). In addition, the marginal buyer of Treasuries will increasingly demand a higher term premium, supporting a steeper US curve and a structurally weaker dollar against the euro. For corporate issuers, the EUR–USD funding-cost differential is expected to widen, favoring euro issuance (reverse Yankee issuance) that may support EUR investment-grade bonds over their US counterparts.