Asset managers like Amundi and Schroders are increasingly positioning themselves in longer-dated European government bonds, betting on faster-than-expected rate cuts. Meanwhile, U.S. asset managers are taking a more cautious approach to European duration exposure, highlighting the divergence in market sentiment across the Atlantic.
Amundi, Europe’s largest asset manager, has boosted its exposure to longer-duration euro-denominated bonds following the recent surge in bond yields. This reflects broader shifts in economic conditions and central bank policies, signaling a potential turning point in fixed-income markets.
“The growth outlook remains weak, and the European Central Bank (ECB) has room to accelerate rate cuts in 2025,” Amaury D’Orsay, head of fixed income at Amundi, told Investment Officer.
Dovish ECB expected
D’Orsay expects a more dovish ECB stance to drive yields lower, creating a favorable environment for longer-duration positions. As yields drop, longer-term bonds could appreciate in value, attracting investors looking to lock in returns ahead of further rate cuts.
The ECB appears poised to quicken its rate-cutting pace, with a second 25-basis-point reduction in less than a month anticipated on Thursday. This would bring the ECB’s policy rate to 3.25 percent, down from 4 percent in June. At this pace, rates could slip below 3 percent by January—far ahead of forecasts that initially expected a gradual decline by mid-2025.
Inflation and economic weakness
A key factor driving this shift is the sustained decline in Eurozone inflation, which fell to 2.2 percent year-on-year in August, the lowest level since mid-2021. Core inflation dropped to 2.8 percent, although stubbornly high services inflation, still at 4.2 percent, poses risks to price stability.
At the same time, the eurozone’s broader economic recovery is faltering. Second-quarter GDP growth was just 0.2 percent, missing expectations. Regional disparities are also emerging, exposing vulnerabilities in the bloc’s economy.
Germany, the eurozone’s largest economy, remains fragile, with leading indicators showing little sign of improvement. Adding to concerns, the yield on French 10-year government bonds has now surpassed Spain’s, raising questions about France’s fiscal sustainability.
Schroders’ ‘favoured long’
Schroders, too, has grown more concerned about the eurozone economy, making duration in Europe a ‘favoured long.’ “The ECB has begun its easing process but has been cautious, easing only quarterly and offering limited forward guidance,” a Schroders note said. “If the macro trajectory continues to weaken, there’s significant room for the ECB to turn more dovish and speed up its cuts.”
This marks a shift from earlier in the year, when many asset managers favored shorter-duration bonds, anticipating rising rates. The move toward longer-duration positions now reflects recalibration as central bank policies evolve.
U.S. firms reassessing European strategies
While European asset managers extend duration, U.S. firms are reassessing their strategies in European bonds, albeit with varying confidence levels. BlackRock, the world’s largest asset manager, has adopted a more neutral stance on European duration, citing the need for more clarity on ECB policy.
“We prefer quality and income in bonds, which we find in Europe’s short-term credit markets and government bonds,” the BlackRock Investment Institute said in a recent commentary. “Yields in Europe better reflect our expectations for rate cuts than in the U.S.,” the firm added, though it cautioned that political risks could impact fiscal sustainability in key European markets.
Pimco is also cautious on European duration. “While ECB terminal rate pricing seems reasonable, there’s still uncertainty around the pace of the easing cycle,” Pimco said in its latest outlook. The firm remains neutral on duration but sees opportunities in curve steepening, with the yield curve between 10- and 30-year bonds remaining flat.
Diverging duration strategies
The contrast between European and U.S. duration strategies is stark. Many asset managers continue to maintain an underweight position on U.S. duration, citing concerns over the Federal Reserve’s policy trajectory and market volatility.
“During the summer, disappointing macro data, combined with a dovish pivot from the Federal Reserve, led to outsized expectations for rate cuts,” D’Orsay said. “We believe these expectations were overblown, and as a result, we have maintained an underweight position in U.S. duration.”
This view has been validated by the sharp rise in U.S. Treasury yields. The 10-year Treasury yield rose from 3.6 percent in early September to over 4.1 percent by last Friday, leading to capital losses for holders of longer-duration bonds. Despite this, the U.S. economy has shown resilience, with strong job market data and consumer spending supporting growth.
As D’Orsay noted, “The market will remain volatile around macro data releases, especially on employment. U.S. elections will also inject volatility, with an uncertain outcome looming.”