Five reasons to bet on Europe
Europe’s fiscal transformation is shifting market dynamics as Germany’s spending surge reverberates across the continent. Explore five critical insights on how fiscal expansion, inflation pressures, and central bank positioning are reshaping European fixed income opportunities in 2026.
Skepticism on Europe’s growth renaissance is fading as conviction builds around fiscal spending. After a muted 2025, Germany’s fiscal expansion is set to accelerate meaningfully in 2026, with infrastructure and defense spending ramping up and early signs of transmission already visible in rebounding manufacturing orders.
Europe’s fiscal boost is real
Infrastructure spending targets total €37bn in 2026, up from €24bn in 2025, while defense expenditure expands further. Manufacturing orders rose 10% quarter-on-quarter in the fourth quarter, one of the strongest increases in unified Germany’s history. This fiscal impulse creates powerful spillovers for European trading partners through the planned €800bn ‘ReArm Europe Plan’ and €150bn EU-funded SAFE defense loans.
Inflation contained, but yields rising
While fiscal spending has inflationary potential via energy markets, cost-containment measures could cap upside price pressures. Even so, a higher inflation backdrop alongside elevated bond issuance point to sustained upward pressure on bund yields through 2027. We expect 10-year bund yields at 3.15% by year-end 2026.
Peripheral spread compression continues
Spain delivered 2.8% growth in 2025, while Italy’s structural picture is compelling with employment at record highs and an improved fiscal position. This supportive macro backdrop could drive the 10-year BTP-bund spread toward 50 basis points. The ECB’s extended policy pause reinforces stability, with our view for modest tightening beginning in early 2027.
U.K. gilts: belly of the curve preferred
The Bank of England could take a more supportive stance with softer growth and cooling inflation. The belly of the curve offers compelling valuations and stronger carry dynamics. Our base case remains for two rate cuts in 2026, taking the benchmark policy rate to 3.25%.
Explore Europe’s fiscal transformation
Dive deeper into how Germany’s spending revolution, peripheral spread opportunities, and central bank policies are reshaping European fixed income markets.