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- Higher yields, fiscal uncertainty and sovereign issuance are restoring the role of fixed income in European portfolio construction.
- ETFs and index strategies are helping investors express active views across duration, credit quality, currency and maturity.
- ETF innovation is expanding as investors seek targeted tools for bond exposure, liquidity management and benchmark-aware implementation.
Europe’s fixed income markets are entering a new phase. Higher yields, greater market fragmentation and continued product innovation are changing not only where investors allocate capital, but also how portfolios are constructed and investment strategies are implemented. At a recent ETFs in Depth event hosted by Bloomberg in London, industry experts discussed how ETFs and index strategies are helping investors navigate this new landscape.
PRODUCT MENTIONS
With global ETF assets reaching $25 trillion and Europe’s ETF market growing to US$3.4 trillion, according to Bloomberg Intelligence, ETFs are becoming increasingly central to how investors access bond markets. Their scale is helping drive greater liquidity, transparency and efficiency across fixed income, while also enabling investors to express increasingly precise views across duration, credit, currency and maturity.
Why investors are reassessing European bonds in a higher yield environment
The era of quantitative easing has given way to a new investment landscape. In Europe, fiscal expansion, increased government borrowing and an uncertain global backdrop have restored meaningful yields to fixed income markets. As a result, investors are reassessing an asset class that, for much of the past decade, offered little income.
“If you’re looking at getting 4%, 5% or 6% yields in relatively high-quality areas across fixed income, there are plenty of good stories to look at,” says Raphael Stern, Global Head of Fixed Income PM, ETF & Indexed Investments at Invesco. While credit spreads remain relatively tight, he says investors should focus on higher-quality opportunities and be selective about duration and credit risk rather than simply chasing yield.
Marco Bontognali, Deputy Head of Index Fixed Income Portfolio Management at UBS Asset Management, says today’s yield environment has fundamentally improved the investment case for bonds. With government bond yields in major markets once again offering attractive income, he says investors can expect carry to become a more meaningful contributor to long-term total returns. Although inflation and fiscal uncertainty persist, he says the yield available across fixed income continues to provide a compelling entry point for investors.
Higher yields, however, also reflect a more uncertain investment environment. Rachel Baxter, Head of Investment management, Europe and Head of Bond Index, Europe at Vanguard, says bond markets are responding more directly than equities to fiscal, geopolitical and monetary policy uncertainty, leading to greater volatility as investors continually reprice risks.
She says this environment also reinforces fixed income’s traditional role in portfolios. With yields remaining above inflation and high-quality government and investment-grade corporate bonds offering both income and diversification, she says investors are once again being rewarded for allocating to the asset class.
Market fragmentation and changing fixed income portfolio construction
Higher yields alone aren’t enough to explain the shift. As the panel explained, a more fragmented market, characterized by divergent central bank policies, increased sovereign issuance and wider dispersion across sectors, is making portfolio construction more nuanced. As a result, investors are making increasingly active allocation decisions, even when investing through index-based strategies.
“In fixed income, I would say it’s all active, even on the indexing spectrum,” says Baxter, noting that the sheer number of securities in bond indices requires managers to continually sample holdings and make implementation decisions. She says increased sovereign issuance across Europe is creating new relative value opportunities, even within benchmark-tracking portfolios.
Bontognali says the line between active and passive is blurring. “We do see signs that this regime is changing,” he says, adding that greater market fragmentation is creating both risks and opportunities. While passive strategies remain appropriate for many long-term investors, he says those who can tilt portfolios more actively stand to benefit from diverging policy paths, for example, favoring euro duration over US duration.
Stern says selecting an ETF is itself an active allocation decision, whether investors are choosing between maturities, currencies or sectors. “Quite frankly, a lot of active managers are using index tools to implement those views,” he says. Rather than representing competing approaches, active management and index investing are increasingly complementary, with index-based tools providing an efficient means of implementing active portfolio decisions.
Why investors are looking for more targeted fixed income ETFs
As fixed income markets become broader and more complex, investors are looking at new ways to manage duration, credit risk and portfolio objectives. The result is a wave of ETF innovation, with product development increasingly focused on helping investors express specific investment views rather than simply providing broad market exposure.
“ETFs… have really increased the liquidity of the bond market,” says Baxter. Describing fixed income as very fragmented, she says ETFs have created a liquid wrapper that enables investors to gain or adjust broad market exposure more efficiently. Combined with advances such as portfolio trading, basket trading and greater electronification, she says these developments have improved transparency, price discovery and the market’s ability to navigate periods of volatility.
Bontognali says the COVID-19 market disruption demonstrated those benefits. “People could still trade in and out of ETFs,” he says, even when secondary trading in many underlying bonds had effectively disappeared. Rather than signaling a weakness, he says ETF pricing reflected prevailing market conditions while providing investors with an additional layer of liquidity.
Innovation is also becoming increasingly targeted. Baxter says target maturity ETFs are one of the most significant recent developments, allowing investors to “pick your liability point and know you’ve got a diversified basket” rather than relying on individual bonds or constantly rebalanced portfolios. She also says the surge in AI-related debt issuance by hyperscale technology companies is an emerging opportunity, as strong fundamentals combined with large issuances could create attractive opportunities for active managers with robust credit research capabilities.
Stern says innovation begins with investor demand. “Our product pipeline is full,” he says, explaining that issuers are continually reprioritizing new launches based on client needs. With products ranging from government bond ETFs to active fixed income strategies and increasingly specialized exposures, innovation is increasingly focused on helping investors express more precise views across duration, credit quality and sectors.
As Europe enters a new fixed income era, investors are navigating a market defined by higher yields, greater fragmentation and rapid innovation. In this environment, benchmarks are also evolving to reflect changes in market structure, liquidity and the expanding universe of investable fixed income sectors. Bloomberg Fixed Income Indices are designed to capture these developments through transparent, rules-based benchmarks that reflect today’s bond markets.
Reflecting how fixed income markets are evolving
As fixed income markets continue to evolve with the growth of ETFs, electronic trading and expanded credit segments, benchmarks are being reassessed to better reflect how fixed income functions today. Bloomberg is committed to broadening its suite with new benchmarks that reflect real-world market structure, liquidity and accessibility.
Explore Bloomberg Fixed Income Indices
Insights in this article are based on panels and fireside discussions at the ETFs in Depth event held in London in June 2026.