Three major issues driving previous euro weakness have been fixed: following the resolution of the 2012 European sovereign debt crisis, the European Central Bank (ECB) has proven and diversified tools at its disposal; the period of negative interest rates is over and European yields are now at attractive levels relative to history; and the ECB is no longer constraining the supply of euro bonds through quantitative easing.
The depth and liquidity of the euro bond markets have also been issues in the past but have improved over time. In investment-grade corporate credit, for instance, the euro market is now over 40% the size of the USD market—plenty big enough to warrant a higher allocation for global investors.
A modest percentage reallocation out of USD bonds into euro fixed-income could have an outsize impact in price terms, in our analysis. For example, the German government bond (Bund) market is one-tenth the size of US…
