Two Bond Market Strategists Say International Government Debt Now Beats U.S. Treasuries on Yield and Diversification

The Setup

The Federal Reserve has not raised interest rates since July 2023. That pause has kept U.S. Treasury yields anchored while central banks in Europe, the UK, and Australia have continued tightening or are priced to do so.

What Allspring's Bory Is Recommending

George Bory, chief investment strategist for fixed income at Allspring Global Investments, told CNBC's ETF Edge this week that he is steering clients toward short-to-intermediate duration government bonds in developed markets outside the U.S.

"Bond markets everywhere have rushed to price inflation. Places like the UK, certainly across Europe, even places like Australia — we've seen a material run-up in central bank tightening expectations," Bory said.

His reasoning is straightforward: when a central bank is raising rates aggressively, bond yields move higher, which benefits investors who buy before or during those moves. The U.S. rate cycle, by contrast, is stalled.

Bory recommends mixing international duration with some U.S. exposure to let investors "play different rate cycles," which he says "works really, really nicely" as a portfolio construction tool.

The ECB Move That Started This Conversation

The European Central Bank raised its benchmark rate 25 basis points to 2.25% on June 11 — its first rate hike since September 2023, according to CNBC. Market pricing expects at least some additional tightening.

Bory's caveat is important here: whether European bonds continue to outperform depends partly on the Fed. "Unless the Fed is going to validate those moves, they're going to have to move at a slower pace than perhaps what's priced in," he said. If the Fed stays put, Europe's hiking cycle could run out of steam faster than current pricing suggests.

BlackRock's iShares Desk Agrees

Steve Laipply, global co-head of iShares Fixed Income ETFs at BlackRock, also told CNBC he sees advantages for U.S. investors going abroad. He specifically flagged European fixed-income securities as offering lower risk combined with higher yields.

The Fed Wildcard

The CME Group's FedWatch tool, as of late this past Friday, showed a 78% probability the Fed raises rates in December. That probability slips to 68% for January 2027. Those are market estimates based on futures pricing, not confirmed policy decisions.

If the Fed does hike before year-end, the international-over-U.S. bond thesis gets complicated. A Fed rate increase would push U.S. Treasury yields higher, making domestic bonds more competitive and potentially strengthening the dollar, which cuts into returns for U.S. investors holding foreign-currency-denominated bonds.

The Fair Counter-Argument

Skeptics of the international-bond trade have a legitimate case. Currency risk is real and often underappreciated by retail investors who have spent decades in U.S.-centric portfolios. A foreign-currency-denominated bond can become a loser in dollar terms if the dollar strengthens over the holding period. Bory and Laipply are speaking primarily to institutional clients — Allspring's client base includes consultants, financial advisors, corporations, and financial institutions — who hedge currency exposure systematically; smaller investors typically do not.

There is also a political risk dimension. Europe's fiscal situation carries sovereign credit risk that U.S. Treasuries do not. Liquidity in a stress scenario favors U.S. markets by a wide margin. These are not trivial objections.

Bory's specific recommendation is short-to-intermediate duration developed-market government bonds, not peripheral European credit. That narrows the credit-risk concern considerably and focuses the trade on rate-cycle divergence.

Who Actually Has Access to This Trade

Bory's note that "many bond investors are very U.S.-centric" is accurate. As he put it: "It's a big world out there, you know. The global bond market is massive, and diversifying both your duration, your credit risk, and even your security selection can do … good things for your portfolio."

The practical vehicle for most retail investors would be international government bond ETFs. Those funds carry currency exposure by default unless the investor selects a hedged share class, which typically carries higher fees.

The Open Question

The trade assumes the ECB and other developed-market central banks complete their hiking cycles while the Fed remains on hold. If U.S. inflation re-accelerates and the Fed hikes aggressively in late 2026, that reverses the rate-differential logic entirely. The CME's 78% December-hike probability means one in four traders currently disagrees with the consensus, and bond markets have a long track record of pricing premature policy pivots in both directions. Bory's own caveat — that European rate expectations may already be "priced in" — is the risk that buyers of international duration should sit with before committing capital.