A strategy for US investors to counter domestic market risk involves buying European bonds and not hedging the currency. This combines a modest ~3% bond yield with an expected ~7% appreciation of the euro against the dollar, driven by diverging central bank policies.

By modeling three geopolitical scenarios—swift, sticky, and prolonged—analysts determine that current European bond yields and peripheral spreads reflect an outcome between a months-long conflict with lingering energy premia and a more severe, protracted crisis. This provides a framework for assessing risk and valuation.

Despite a recent sell-off, German Bunds are seen as attractively valued compared to US Treasuries. The US-Germany spread is considered too tight, with US yields approximately 7 basis points too expensive versus their Euro counterparts, presenting a cross-market opportunity for fixed income investors to favor German debt.

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.

A key macro theme is the decoupling of US and German interest rate paths. J.P. Morgan expects US Treasury yields to rise toward 4.5% due to a hawkish Fed and strong labor markets. Conversely, weak eurozone growth and lower fiscal pressure suggest German yields have scope to fall, creating a clear medium-term relative value opportunity.

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.

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.

Despite near-term volatility, the risk of German 10-year yields sustaining a move above 3% is considered low. This makes the 3% level an attractive entry point for long-term investors, supported by strong investor demand and the view that a significant fiscal risk premium is not a major concern for Germany.