In response to shifting investor demand and steeper yield curves, Euro area sovereigns have aggressively reduced the weighted average maturity (WAM) of their debt issuance. The average issuance WAM has fallen from a peak of 13 years during the COVID era to a projected 10 years in 2026, reflecting a major strategic shift.
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While overall net government bond issuance is forecast to drop 13%, this is solely due to the U.S. When measured by duration (10-year Treasury equivalents), gross supply is actually projected to increase by 1% year-over-year. This presents a more challenging picture for markets than the headline number suggests.
Despite a sizable fiscal boost, Germany is not expected to experience rising term premium. The country's debt-to-GDP ratio remains low, and strong demand from the private sector and foreign investors is forecast to easily absorb the increased bond supply, containing upward pressure on yields.
While gross Euro area sovereign bond issuance is set for a new record in 2026, this is primarily driven by Germany. Net issuance for the region will remain similar to 2025 levels, as deficits in other countries are flat or declining, mitigating overall supply pressure.
A surge in European retail investment into Fixed Maturity Products (FMPs) creates a stable, long-term demand base for short-dated corporate bonds. This "locked-up" capital anchors the short end of the curve, providing stability during volatile periods and potentially distorting risk pricing.
Despite Germany's fiscal expansion driving record Euro area gross issuance, the resulting €60 billion increase in German bonds is considered insignificant for a triple-A issuer. Analysts argue this amount is easily digestible and does not warrant concerns about rising term premium, especially when compared to the scale of U.S. Treasury issuance.
Germany's finance agency signaled it would adjust debt issuance in response to a steepening yield curve. This sensitivity acts as a structural anchor on intermediate-term yields, creating a potential outperformance opportunity for German bonds versus US and UK debt, which face greater fiscal pressures.
With credit curves already steep and the U.S. Treasury curve expected to steepen further, the optimal risk-reward in corporate bonds lies in the 5 to 10-year maturity range. This specific positioning in both U.S. and European markets is key to capturing value from 'carry and roll down' dynamics.
The modern high-yield market is structurally different from its past. It's now composed of higher-quality issuers and has a shorter duration profile. While this limits potential upside returns compared to historical cycles, it also provides a cushion, capping the potential downside risk for investors.
When the Treasury does increase coupon issuance, it will concentrate on the front-end and 'belly' of the curve, leaving 20 and 30-year bond auctions unchanged. This strategy reflects slowing structural demand for long-duration bonds and debt optimization models that favor shorter issuance in an environment of higher term premiums.
When a steepening yield curve is caused by sticky long-term yields, overall borrowing costs remain high. This discourages companies from issuing new debt, and the reduced supply provides a powerful technical support that helps keep credit spreads tight, even amid macro uncertainty.