MILAN, March 5 - German government bonds are increasingly being viewed as one of several safe-haven choices rather than the dominant refuge they have often been in past market stress episodes. Investors are directing cash toward alternatives such as gold and certain currencies, driven by worries that Germany's fiscal intentions and a shrinking European Central Bank (ECB) footprint in bond markets could create a supply-demand mismatch and lift yields.
Historical returns underline how safe-haven leadership can shift. In the year from May 2008 to May 2009, the U.S. dollar was the largest gainer among classic havens, rising 14% with the Japanese yen as the next strongest performer, according to LSEG data. German Bund prices increased nearly 6% over that period - a gain comparable to gold - while U.S. Treasury prices were effectively flat and the Swiss franc declined about 6%.
More recent stress episodes show similar dispersion among havens. During the market turmoil associated with the pandemic in 2020 and after the market reaction to a sweeping tariff announcement in April of an earlier U.S. administration, Bunds underperformed bullion and the Swiss franc, even as other government bond markets and currencies moved differently.
Bunds were caught up this week in a global government bond rout after an escalation of the air war in the Middle East and an associated spike in oil prices revived concerns about rising inflation. Yet signs of Bunds losing exclusive haven status predated that episode. Following a period of renewed geopolitical rhetoric - including repeated threats by a former U.S. president to annex Greenland and pressure on NATO allies to increase defence spending - investor focus turned toward Germany's plans for fiscal expansion and the potential for a significant increase in its debt issuance.
"With any shock that pushes us further down that path (of more fiscal spending), Bunds will probably act less as a safe haven than they did in the past," said James Bilson, fixed income strategist at Schroders. "We’re currently somewhat underweight, or effectively short, German Bunds versus the UK, and also on an outright basis," Bilson added.
Another factor making Bunds less compelling for some investors is yield. German 10-year Bund yields are among the lowest in major developed markets, at just 2.71%, compared with 4.02% for 10-year U.S. Treasuries and 4.4% for UK gilts. That relative yield disadvantage reduces appeal for investors seeking higher returns.
Economic fundamentals and policy timing also play a role. Economists anticipate Germany's planned fiscal stimulus will be a substantial boost to the economy, but the bulk of that support is not expected until 2027. As a result, growth in Germany could remain challenged for the remainder of the current year.
Meanwhile, some Southern European economies, including Spain, are still registering economic growth and maintaining fiscal discipline, which has led to credit rating upgrades for parts of the region. These developments have narrowed the room for German bond outperformance: Bund prices rose roughly in line with French and Italian debt during the technology-led equity selloff in February.
Investors' perception of country risk within the euro area has been shifting. The spread investors demand to hold Italy's 10-year bonds over Germany's - the widely watched yield premium - has been around 61 basis points recently, after narrowing to about 53 basis points in January, the lowest level since summer 2008. Expectations of more European Union joint debt issuance have supported borrowing conditions for highly indebted member states such as Italy and France by promising a more even distribution of the bloc's debt burden.
"What we are seeing right now is that the region is showing signs of convergence, that is more of a reason to expect Bunds to rally less than in previous times (of crisis)," said Luca Salford, euro rates strategist at Morgan Stanley. "We are very far from starting quantitative easing measures again and from concerns about other countries being significantly more at risk than Germany from a macro point of view," he added.
The ECB's balance-sheet adjustments have also affected Bunds disproportionately. As the ECB reduces the holdings it accumulated through its COVID-era quantitative easing programme, Germany - as the largest economy in the euro area and therefore the largest beneficiary of those purchases - has felt a heavier lift on supply. That shrinking central-bank demand has changed the composition of market participants in the German bond market.
Rufaro Chiriseri, head of fixed income at RBC Wealth Management, said Bunds continue to have a role as a haven, but face tougher competition. "Bunds will still have a haven space, but after a structural change in the fixed income market, they’re competing" against other safe haven assets like the Swiss franc and the yen, she said. "With the ECB no longer a major buyer in the bond market, the share of yield-sensitive investors is rising, and that matters even more for Germany, which still relies on foreign investors outside the euro area for around 40% of its demand."
The combined effect of domestic fiscal plans, a receding ECB buyer, and a shifting landscape of safe-haven assets suggests Bunds may not perform as they once did during episodes of stress. Investors and market strategists will be watching how supply changes and investor preference evolve, particularly as the euro-area policy environment and relative yields continue to exert influence on cross-border flows.
Key points
- Germany's planned fiscal expansion and the ECB's roll-off of pandemic bond holdings have raised concerns that German Bunds could face a supply-demand imbalance, reducing their safe-haven appeal.
- Bunds are among the lowest-yielding major sovereign bonds at 2.71% for the 10-year, making them less attractive relative to 10-year Treasuries (4.02%) and UK gilts (4.4%).
- Convergence in euro-area borrowing costs and the prospect of EU joint debt issuance have supported bonds of other member states, narrowing Bunds' traditional relative outperformance.
Risks and uncertainties
- Higher German fiscal spending could weaken Bunds' status as a safe haven, affecting fixed income markets and investors seeking lower-risk assets.
- Reduced ECB purchases of government bonds increase reliance on yield-sensitive and foreign investors, a shift that could amplify volatility if demand shifts, impacting sovereign debt markets.
- Geopolitical shocks - such as escalations in the Middle East and related oil-price moves - can reignite inflation fears and trigger global bond selloffs, placing upward pressure on yields.