I was recently helping a lifelong friend and client with his Government TSP investment allocation. Every time I look into the TSP investment options, I am shocked that they don’t have an option for international bonds. There are times, like possibly now, when these investments might be a good hedge.
The event that has put international bonds back into focus is Germany’s recent decision to change its government’s economic policy dramatically. In early March 2025, Friedrich Merz, Germany’s incoming Chancellor, announced a historic shift in fiscal policy, vowing to do “whatever it takes” to strengthen defense and revitalize its economy. Facing a weakening alliance with the US under President Trump, who, in fact, pushed Europe to take on more of its own security responsibility. Merz proposed loosening Germany’s strict constitutional “debt brake,” which restricted its country from borrowing and creating national debt.
Germany’s plan for hundreds of billions in defense spending and 500 billion in infrastructure spending requires investors to reassess their investment strategies. This change in Europe’s biggest economy has significant consequences for global markets, especially US fixed-income investors.
There Could be Opportunities in European Fixed Income
Germany’s upcoming debt issuance and the potential for many other Eurozone countries to follow suit will increase bond supply and put downward pressure on prices in the short term. This could allow US investors to buy European debt at attractive levels.
Inflation Risks and Monetary Policy Challenges
It’s not all roses. Germany’s stimulus could reignite inflation in the Eurozone, especially if the region that has not fully recovered from the pandemic era begins to speed up its recovery. If it did, it would lead the European Central Bank (ECB) to raise its key rate, pushing European yields higher and putting a stranglehold on European companies. Other economic challenges could also come into play, such as trade tensions (i.e., tariffs) and out-of-sync Eurozone fiscal policies that could impact bond performance.
Germany’s economic transformation could realign global fixed-income markets, which could provide investors opportunities. While the recent move higher in Eurozone yields has narrowed the yield advantage of US bonds, the US still out-carries most of the developed world. The Bloomberg Aggregate Bond Index (Agg), the main index for US fixed-income, currently has around 4.7% yields. In comparison, European bonds yield between 1.0% and 1.50% lower according to the Bloomberg Pan-Euro and Euro Aggregate indexes.
A global approach could make sense for investors fully invested in U.S. bond markets, particularly given the uncertainty surrounding tariffs and trade wars emanating from the US, though valuations/yields still favor US fixed-income markets. I still prefer US bonds to international bonds, but the recent changes in Europe have caught my attention. I will monitor their inflation trends and economic data to see if a clearer opportunity exists.
Now for a little soapbox. The TSP only has five investment options. I don’t work for the government, nor do I work with the Thrift Savings Plan (TSP), but these people need more investment options. I have some concerns about federal workers, but I also have a great concern about our active-duty military, which is stuck with the TSP program and deserves more than five investment options! They are protecting us all, and the least we can do is offer them more options for their financial benefit and that of their families. Ok, I will step off my soapbox now.
Have a blessed week!
Richard Baker
Opinions voiced above are for general information only & not intended as specific advice or recommendations for any person. All performance cited is historical & is no guarantee of future results. All indices are unmanaged and may not be invested directly.
The economic forecast outlined in this material may not develop as predicted & there can be no guarantee that strategies promoted will be successful.
Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.