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.

Major European allies like the UK and France face a "lethal problem" where raising defense spending to meet US-led targets could trigger a bond market revolt. This fiscal constraint, coupled with voter opposition to tax hikes, makes meeting these commitments politically and economically untenable.

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.

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.

Increased defense spending is not just a security measure. It presents a prime opportunity to create a European safe asset, funded at both national and EU levels, which is key to developing the deep, liquid capital market Europe currently lacks.

Global diversification away from the US dollar, accelerated by geopolitical tensions, is creating structural demand for Eurozone Government Bonds (EGBs). This acts as a buffer, making Euro area term premia less reactive to global rate sell-offs in markets like the US and Japan, a trend expected to continue.

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.

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.