European government bonds: a stronger case for active management

European government bonds offer attractive real income, but widening fiscal and political divergences make selective active management more valuable than passive exposure.

• Nominal euro government bond yields now stand above market-implied long-term inflation expectations, reversing the deeply negative real-yield conditions of the previous decade.
• For the first time since the Global Financial Crisis, real yields on euro government bonds exceed eurozone real long-run growth expectations, reducing investors’ reliance on capital gains from falling rates.
• ECB balance-sheet normalisation since quantitative tightening began in 2023 has removed a price-insensitive buyer, forcing private investors to absorb more net issuance and increasing dispersion between sovereign issuers.
• Fiscal pressures differ sharply across countries as debt-service costs, ageing-related spending and defence commitments rise; Spain has a snap election in late November 2026, while France, Italy and Greece face national elections in 2027.
• Schroders combines scenario-based analysis of growth, inflation and monetary and fiscal policy with country-level spread valuation to distinguish lasting changes in fiscal credibility from temporary political dislocations.

Takeaway: Attractive market-wide yields provide an income foundation, while political and fiscal divergence may create relative-value opportunities; investors should favour flexible country selection and resilient positioning rather than assume all euro sovereign bonds offer the same risk.