Government bonds inch higher
Government bond yields are moving higher as year-end approaches. US ten-year Treasury yields are at 4.15%, German ten-year Bunds at 2.85% and Dutch government ten-year bonds are hovering at around 3%. Liquidity markets are also impacted by the end of the year.
The picture of 2025 for US Treasuries was challenging but, in the end, US government bonds were able to trade very well, and shocks were reasonably absorbed. During the big shock in April, when Trump announced his initial tariff policy and when global investors were scared by a potential drop in growth, markets managed to cope. US ten-year Treasuries traded close to 4.80% in January 2025 and touched below 4% in early April. A 50-basis-point range remained during the rest of 2025.
For the first half of 2026, markets expect that ten-year US Treasuries will trade within the range seen in 2025, i.e. from 3.95% to 4.80%. But a lot depends on the US Federal Reserve. Most recently, the Fed reduced their official rate by 25 basis points. At the same time, the Fed Chair said that future changes will be dependent on data and refrained from promising any guidance on future rates. The Trump administration wants lower rates, but inflation remains a risk.
Our fixed-income investment view is based on the transition from a “savings glut” to a “bond-glut.” In an environment where more governments need to finance fiscal budget shortfalls, bond yields are remaining higher than what was seen during the pandemic. We appear to be in a normalisation phase, which means limits for lower rates at the longer end of the yield curve. Because of this, the US, UK, Japan and certain European countries are reducing their borrowing at the longer-end, as demand for longer-maturity bonds has significantly declined.
Instead, these governments are moving towards issuing more shorter-term debt in order to avoid bigger shocks for their borrowing. A shift in bond demand is, in particular, a theme in the Netherlands, where pension funds are significantly reducing their demand for ultra-long bonds as they make a transition to a defined contribution pension model. Governments issuing debt need to act on the shift in demand. We are keeping a fair duration exposure (4.4 years), as we see more risk at the longer-end of the yield curve. (Duration is a measure of a bond’s sensitivity to changing interest rates.) We also advise focusing on quality when selecting bond investments.