Eurozone government bonds favored over stock market due to flight to quality amid uncertainties
From Morningstar: 2025-06-27 12:09:00
Eurozone government bond prices have been volatile in the first half of the year, with a “flight to quality” potentially favoring government bonds over the stock market. Tariffs are driving money into European debt, with the Morningstar Eurozone Treasury Bond Index up 0.62% in the first six months amid geopolitical risks and trade war uncertainties.
In Q3, inflation and fiscal policy decisions will likely influence eurozone government bond yields. Factors like Middle East developments, the trade war, increased defense spending, and ECB interest rate decisions will impact bond prices. The stock market’s exposure to economic risks could lead to a flight to quality favoring government bonds over equities.
Increased defense spending in Europe may raise government spending, potentially leading to higher budget deficits in countries like Italy, Spain, and France. Despite this, government bonds are seen as a shelter from stock market volatility. Managers have a positive outlook on eurozone government bonds, while remaining cautious on US Treasuries due to tax reform and debt sustainability concerns.
Looking ahead, the Fed’s potential decision to lower interest rates could impact eurozone rates, especially if US Treasury yields decrease. Investors are advised to consider the ECB’s future moves and the value of core European government bonds compared to peripheral bonds. Overall, eurozone government bonds are viewed more favorably than US Treasuries due to economic uncertainties.
Investors must consider various factors when investing in eurozone government bonds, including ECB decisions, declining inflation, and growth forecasts. The long and ultra-long end of the European core government curve is seen as offering value, while caution is advised on peripheral government bonds. Italy, Spain, and Greece could contribute positively to portfolio profitability.
Read more at Morningstar: The Eurozone Government Bond Outlook for Q3 and Beyond