Government Bonds: How the Fed's Decision Impacts

July 31, 2025 — The Federal Reserve confirmed yesterday that it will keep interest rates unchanged, maintaining the range between 4.25% and 4.50%. This decision will have key effects on the government bond market, both in the United States and in Europe.

Performance of U.S. Treasury Bonds

Two-year Treasuries yield 3.91%, while 10-year bonds are at 4.40%, and 30-year bonds hover around 4.92%.
The 10‑2 year spread has risen to around 0.51%, a positive value but still below the historical average of approximately 0.85%.

In a context of stable rates by the Fed, short-term yields remain high, making shorter-maturity bonds more attractive than longer-term ones, especially if rate stability or gradual cuts are expected in the fall.

Scenario of European Government Bonds

The European Central Bank also kept rates unchanged:

• Deposit rate at 2.00%

• Main refinancing rate at 2.15%

• Marginal lending rate at 2.40%

The economic backdrop shows inflation stabilized at 2%, wage pressures easing, and moderate but resilient growth.
Yields on 2-year German Bunds are around 1.90%, while 10-year Bunds yield approximately 2.69%.

Technical Comparison: Recommended Bond Strategies

Which bonds should you choose today?

If you expect rates to remain stable or decline slightly by the end of the year:
Prefer short-duration U.S. Treasuries (2–5 years) to lock in current yields with lower interest rate exposure.
If you have a long-term investment horizon and can tolerate volatility, 10–30 year U.S. Treasuries offer attractive yields (~4.4%–4.9%).

In the case of a euro-denominated portfolio:
For stability, short-term German Bunds (2 years at ~1.9%) provide protection against liquidity shocks.
If you're seeking higher returns and can tolerate more volatility, 10-year Bunds (2.69%) are a solid alternative.

In conclusion, with interest rates remaining unchanged by both the Fed and the ECB, an optimized portfolio today should focus on:

• Short durations in the U.S., for greater flexibility and solid yields.

• Medium-to-long durations, if you want to lock in high returns and are prepared to handle long-term volatility.

• In Europe, due to lower yields, the choice typically lies between short-term bonds for stability or long-term bonds for marginally higher returns.

Final note:

Sonal Desai, Chief Investment Officer for Fixed Income at Franklin Templeton, advises caution: with current U.S. Treasury yields at 4.4–4.5%, this is not yet a “buy at any cost” environment. She recommends shorter durations to hedge against potential rate hikes and to maintain fixed income as a stabilizing element within portfolios.