Bond Bubble – The Underestimated Risk
Analysis by Ullrich H. Angersbach | Updated: October 2025
The Era of Falling Interest Rates and Price Gains
For decades, bonds were considered safe havens for cautious investors. The promise: stable interest, low volatility – and, for highly rated sovereign bonds, virtually risk-free. Over 25 years, global interest rates steadily declined – German government bond yields fell from 9% in the early 1990s to temporarily below 0%. In parallel, bond prices rose, providing investors with additional profits.
The REX Performance Index – Germany’s benchmark bond index – reflected this development: investors earned both interest and price gains, even at comparatively low risk.
The Turning Point Since 2022 – A Break with the Past
- Inflation in Europe and the U.S. rose above 8% in 2022–2023.
- The ECB and the U.S. Federal Reserve were forced to raise policy rates sharply.
- 10-year German Bunds yielded around 3.2% in summer 2024, U.S. Treasuries over 4.5%.
- By spring 2025, German 10-year bonds yield about 2.8% as inflation eases slightly, but remains elevated.
This means: investors who purchased long-term bonds at historic lows between 2016 and 2021 now face significant book losses. Many underestimated the downside risk.
“The era when bonds were a quiet source of return is over. The interest rate reversal has shown investors that losses in bond prices are very real and often drastic – especially for long maturities.” — Ullrich H. Angersbach, June 2025
Systemic Risk from Rising Debt Levels
- Global sovereign debt surged between 2020 and 2024 – to fight the pandemic, cushion the energy crisis, and fund investments in digitalization and defense.
- Corporates and households in many regions are also nearing the limits of debt sustainability.
- The Bank for International Settlements (BIS) warns that further interest rate hikes could trigger cascading defaults – with severe consequences for the financial system.
What If Countries Like France or Italy Falter?
French and Italian debt levels have reached new records. While soaring spreads like in Greece’s 2010 crisis have so far been avoided, trust is fragile:
- France: downgraded by Fitch in 2024.
- Italy: debt ratio above 145%, low growth despite ECB support.
A loss of market confidence – caused by political instability or missed payments – could drive borrowing costs sharply higher. The result: massive losses for bond investors.
When Confidence Fades – The Bond Crisis in the Eurozone
| Country | Debt-to-GDP (2025) | 10Y Bond Yield | Risk Indicator |
|---|---|---|---|
| Germany | 66% | 2.8% | Solid – high liquidity, top rating |
| France | 113% | 3.9% | Political uncertainty, downgraded |
| Italy | 145% | 4.6% | Structurally risky, ECB-dependent |
| Greece | 161% | 5.1% | Improved credit, but very high level |
| USA | 129% | 4.5% | Rising deficit – debt servicing strain |
Source: IMF, Bloomberg, ECB – June 2025
Conclusion: The Silent Bubble Has Burst – But Few Notice
Ullrich H. Angersbach concludes: “The bond bubble has not exploded – it has deflated slowly, and many only realize it when they check their portfolios. Believing that bonds are still a safe haven means confusing the past with the future.”
Bonds should no longer be considered “safe” by default. The new reality requires active management of interest rate risk and credit quality.
FAQ on the Bond Bubble
- Why is there talk of a bond bubble?
- Because decades of falling rates pushed bond prices to artificial highs, while rising yields since 2022 have caused sharp losses.
- What are the main risks for investors?
- Heavy book losses in long-dated bonds, rising spreads in weaker states, and systemic risks from global debt.
- Are government bonds still safe?
- Partially – highly rated issuers like Germany remain relatively safe, while others face much greater risks.
- How should investors respond?
- With diversification, shorter maturities, and active credit risk management in uncertain markets.