Foreign institutions, particularly sovereign reserve managers, buy US debt not necessarily because of its yield but because no other market is large or liquid enough to absorb trillions in capital. This creates a captive market and keeps US borrowing costs artificially low.

While the U.S. leads in innovation, Europe's fragmented nature creates a more fertile ground for credit investors. The complexity and sheer number of discrete opportunities (e.g., 27 countries with 3-4 cell phone providers each) means the market is less competitive, allowing sophisticated funds to unlock more value.

While international investors frequently raise concerns about 'de-dollarization' and de-globalization, the narrative stalls when considering alternatives. The limited scale and lower yields of European and Japanese credit markets leave US dollar assets as the only viable option for many.

Valuation models show U.S. Treasury yields are too low compared to global peers, particularly German Bunds. The Bund-Treasury spread is seen as 8-10 basis points too low, suggesting U.S. rates could underperform and rise more than their international counterparts, marking a shift to a domestic-driven story.

Despite massive deficits, the US Treasury market hasn't broken because the economy is in a depressionary state. Similar to the 1930s, the overwhelming demand for safety and liquidity from global investors surpasses concerns about the government's fiscal irresponsibility, keeping interest rates low.

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.

The Euro was created with monetary union first, assuming political and fiscal union would follow; they haven't. Now, with nationalist governments rising across Europe, the project's core conflict is exposed. A shared currency managed by inwardly-focused national interests is a fundamentally unstable structure.

Unlike previous financial crises where capital could flee to stable economies, the current spike in bond yields is occurring simultaneously in the US, UK, Japan, and Germany. This systemic issue leaves investors with nowhere to hide, amplifying global risk.