Rising US deficits and debt, coupled with less predictable policy, have created anxiety about US exceptionalism and spurred bond investors to re-examine their diversification options away from US assets. While no other capital market offers the depth and liquidity of the US and there’s no single credible replacement for US Treasuries, we believe that there’s a strong case for considering an increase in ex-US exposure. Europe is a prime candidate: its bond markets have grown, are high quality and may benefit from a fall in yields. And as European markets are considerably smaller than the US’s, even a small shift in US investors’ allocations may make a significant price difference.

European Markets: Credibility Meets Opportunity

The euro is second-largest in the world’s central bank reserve managers’ currency holdings, currently at 20% of total, down from a peak of around 30%. If investors start to rotate out of US dollars (USD) into euro, that could contribute to the euro appreciating against USD.

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