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Monetary policy is diverging on either side of the Atlantic: while the US Federal Reserve is seeking to support growth through interest rate cuts, the eurozone is showing stability. On both sides, however, long-dated bond yields may come under upward pressure, not least due to rising government debt. “Investors should adjust their strategies accordingly,” says Thorsten Fischer, Managing Director and Head of Portfolio Management at Moventum AM. The mid-maturity segment and corporate bonds, in particular, offer attractive opportunities.

Global bond markets are currently reorienting. While the US economy initially appeared more robust than expected in the third quarter, signs of cooling – especially in the labour market – are increasing. In Europe, by contrast, government spending programmes are helping to stabilise growth.

There is also divergence in inflation rates: in the US, inflation remains clearly above the Fed’s target. In August, the key PCE deflator stood at 2.6 per cent, with core inflation at 2.9 per cent. The main drivers are housing costs and medical services, with additional effects from US tariff and immigration policy. Nevertheless, the Federal Reserve recently cut its policy rate by 25 basis points, primarily in response to labour market weakness. Fed officials now expect two further cuts by year-end.

Following the rate cut, yields on two-year US Treasuries briefly fell below 3.5 per cent. At the same time, rising government debt is putting upward pressure on longer maturities. Both factors make a steeper yield curve likely. “For investors, positioning in the belly of the curve is therefore attractive,” Fischer explains: “particularly in the three-to-five-year range, and above all at the short end between one and three years.”

The picture is mixed for US corporate bonds: in the high-yield segment, spreads are below their long-term averages, suggesting no heightened credit risk. With yields around 6.6 per cent, these securities still offer some buffer against spread widening. In the investment-grade sector, spreads are historically tight at roughly 50 basis points. “This does reflect the fundamental strength of many companies,” notes Fischer. “Nonetheless, yields of around 4.8 per cent look thin given a policy rate of 4.0 to 4.25 per cent.”

In the eurozone, inflation is precisely at the European Central Bank’s two per cent target. The core rate (2.3 per cent) also shows little momentum. Cheaper energy, low-cost imports from China and a possible euro appreciation support the disinflationary trend. The ECB is therefore pausing for now. For German Bunds, this implies limited upside potential: ten-year yields are currently at 2.7 per cent, but the government will borrow heavily through long-dated issuance, pointing to further steepening. “As in the US, shorter maturities and the mid-curve look more attractive than long bonds,” Fischer comments.

In European corporate bonds, the strong fundamentals of issuers are also evident in very tight spreads. However, high-yield bonds in Europe, with yields around 5.4 per cent, are more attractive than investment-grade securities, which average just 3.1 per cent and barely outpace sovereign yields. “We therefore see a better risk-return profile in high yield,” says Fischer. Quality of issuers remains key, however: “High yields never come without risk,” he cautions.

Fischer also sees growing appeal in emerging market bonds denominated in local currency. In addition to convincing real yields, many countries show sound fundamentals, retain room for rate cuts, and benefit from the recent weakness of the US dollar. Markets such as Brazil or Mexico offer potential for real returns and additional currency gains. Nonetheless, the asset class remains sensitive to developments in US Treasuries: rising yields can weigh on capital flows and increase funding costs for issuers. “Active risk management is therefore indispensable,” Fischer stresses.

Fischer’s conclusion: “The low-rate environment in Europe and monetary easing in the US create selective opportunities.” In the US, allocations to the short and mid-curve as well as selected high-yield positions look attractive. In the eurozone, strategies along a steepening curve and selective high-yield investments are promising. Emerging market bonds add further diversification potential: “However, they demand close attention to interest rate and currency risks,” Fischer warns.