What’s the Outlook for European Bonds in 2026?

Key Takeaways

• More eurozone government bond issuance is expected next year, as well as credit rating upgrades.
• Government debt will continue to rise in the eurozone.
• France is expected to remain the “weak point” of the euro area.

Despite rising public debt, eurozone government bonds should continue to provide stability within investors’ portfolios into 2026, fund managers and analysts say.

“For 2026, we see a moderately constructive outlook for euro government bonds, particularly in the belly of the curve where valuations look more attractive. The ECB is likely to remain on hold, with inflation close to target, which should keep yields broadly anchored,” says Peter van der Welle, multi-asset strategist at Robeco.

2025 Saw Volatility in European Bonds

The Morningstar Eurozone Treasury Bond Index had a total return of 0.88% in 2025 so far, but experienced periods of high volatility in which prices fell and yields rose. This happened in January due to turmoil in the bond markets triggered by US Treasuries, then in March following the announcement of an increase in German public spending, and finally in September due to the government crisis in France. Volatility eased in the fourth quarter, with government bond yields stabilizing.

Bond Spreads Are Narrowing in the Eurozone

European bond markets are undergoing profound changes, including the convergence of spreads between “core” government bonds, countries such as Germany and France, and “peripheral” bonds of Italy, Spain, and Greece. The spread between the 10-year German Bund, a benchmark for the eurozone, and 10-year Italian government bonds, fell from around 116 basis points at the beginning of the year to 72 basis points. The 10-year Bund yield is 2.68%, compared with 3.43% for the Italian BTP.

According to Massimo Spagnol, fixed income portfolio manager at Generali Asset Management, the narrowing of yield spreads between eurozone government bonds and the improved economic growth prospects in the peripheral countries could make the distinction between “core” and “peripheral” countries “anachronistic.”

“Since 2022, there has been a trend toward narrowing spreads between government bonds issued by eurozone countries,” says Spagnol, who adds that peripheral government bonds outperformed “core” bonds in the past few years.

“The levels currently reached are justified by macroeconomic data trends, such as growth, inflation, deficit, and public debt trajectory. Furthermore, the importance of a country’s political stability should not be underestimated,” adds Spagnol.

Eurozone Countries to Issue More Debt in 2026

European governments issued large amounts of government bonds in 2025 and are expected to continue doing so next year. According to Generali Investments’ calculations, in the first nine months of 2025, gross issuance with maturities of more than one year reached €1.167 trillion, slightly exceeding the figures for the same period last year of €1.123 trillion. Faced with a steeper yield curve and lower demand for long maturities, governments reduced the share of bond issues with maturities of more than 10 years from 42% at the beginning of the year to 31% in the third quarter.

According to the European Commission’s autumn forecast, the euro area debt-to-GDP ratio is projected to rise from around 88% in 2024 to 90.4% in 2027.

“This reflects ongoing primary deficits and the fact that the average cost of public debt is higher than nominal GDP growth. By 2027, four member states are expected to have debt ratios above 100% of GDP,” the commission said.

The EU general government deficit is expected to increase from 3.1% of GDP in 2024 to 3.4% by 2027, partly due to the increase in defense spending from 1.5% of GDP in 2024 to 2% in 2027.

The supply of government bonds is estimated to increase, especially in Germany and France, which are the countries with the highest sovereign ratings, although the latter was subject to downgrades during 2025.

Germany will have to implement its fiscal package, which includes increased spending on infrastructure and defense, while France is facing economic weakness and political instability, making it difficult to pass measures to restructure public finances.

François Rimeu, senior strategist at Crédit Mutuel AM, says France remains “the weak point of the eurozone.”

“The medium-term outlook leaves little room for optimism, and the spread with Germany is likely to struggle to remain below 80 basis points for an extended period,” he says.

Kaspar Hense, a senior portfolio manager at RBC BlueBay, expects upgrades in the EU. “Having seen Greece already upgraded, we also see potential in Italy and Spain. Meanwhile, deficits are all going down further and so are debt levels. Therefore, we should expect some further convergence in valuations for these countries.”

The ECB and Fed Are Diverging

While there may be convergence in government bond yields within the eurozone, investors cannot ignore the divergence that has emerged between monetary policies in Europe and the United States, as this may have an impact on government bond yields.

The European Central Bank has expressed satisfaction with the current stance of its monetary policy, indicating that a cut may only be necessary if economic data deteriorates. It has cut rates eight times to 2% since rates peaked.

In contrast, the US Federal Reserve could cut interest rates several times over the next year, although managers say the easing cycle is probably overestimated by the market.

At around 4%, yields on 10-year US Treasuries are higher in US dollars than those on eurozone government bonds, where the ECB has cut interest rates several times since June 2024. However, Hense prefers eurozone government bonds.

“The US will profit from high nominal growth of around potentially 6%,” he says. The portfolio manager also expects US inflation to remain above 3%, driven mainly by tariffs, making it more difficult for the Federal Reserve to cut rates. “Despite that, we think the market should be prone to sell into the Fed and look for more attractive fundamentals elsewhere.”

Euro investors must also take into account the EUR/USD exchange rate, as it has an impact on final performance.

“It remains to be seen if stronger real growth, and higher nominal yields, are going to continue supporting the USD, or if the inflationary trend is devaluating the value of the currency even more,” says Hense, who believes that US inflation will remain the focus of global government bond markets, including European ones, in the coming year.

Where Bond Managers Are Investing Ahead of 2026

Among euro government bonds, Robeco’s Peter van der Welle favors intermediate maturities, while staying cautious on the long end of the yield curve “where term premium pressures could emerge.” Term premium is the higher yield bond investors expect for holding longer-dated bonds.

Karin Kunrath, chief investment officer at Raiffeisen Capital Management, expects German government bond yields to fall in the medium term, and therefore maintains her current positioning on the asset class.

“We favor five-year US government bonds. In addition, we are increasing our position in German and British 10-year government bonds. We remain slightly more cautious on Italian government bonds, which currently have virtually the same risk premium as French government bonds.”

Lars Conrad, portfolio director fixed income at Flossbach von Storch, says investors should “remain watchful and focus on carefully fine-tuning their portfolios.”

“Duration remains the preferred source of risk, offering better compensation than the credit risk of underperforming issuers,” he says, adding that the combination of high real yields and moderate inflation expectations favors inflation-linked bonds, while flexibility is crucial to seize future opportunities in the bond market.