The difference in yields between U.S. and German 10-year government bonds is diminishing significantly, with the gap expected to shrink further due to significant fiscal policy changes on both sides of the Atlantic. This development is attracting more investment to Europe.

The spread, which currently stands at 158 basis points, a decrease of 62 basis points since the beginning of the year, signifies the varying costs of long-term borrowing between the two governments. This trend, comparable to the 2008 financial crisis, reflects the contrast in interest rates and economic prospects, impacting investment flows, the euro/dollar exchange rate, trade balances, inflation rates, and business earnings.

Germany has recently approved substantial spending increases, moving away from its long-held fiscal conservatism which led to a surge in bond yields. On the other hand, since his inauguration, U.S. President Donald Trump has initiated tariff measures against trade partners, along with reducing the federal workforce and implementing migrant deportations as pledged during the campaign.

Concerns over weakening U.S. economic data have caused trepidation among investors regarding slowed growth, resulting in a decline in Treasury yields. The fiscal outlook is now a key factor contributing to the growing disparity between the U.S. and the eurozone.

Experts suggest that the U.S./German yield spread, as German yields rise, may decrease below 100 basis points, a situation not commonly observed since 2013. While a recession is not ING's central projection for the U.S. economy, they forecast Bund yields between 3.00% and 3.50%, with U.S. 10-year yields nearing neutrality at 4.3%.

Scott Bessent, the U.S. Treasury Secretary, did not dismiss the possibility of such a scenario in a recent interview. Concerns over layoffs in both the government and private sectors, uncertainty regarding U.S. tariffs impacting businesses, and economic uncertainties are contributing to the expected decrease in U.S. yields, potentially resulting in a yield spread below 100 basis points.