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The incentive to hold onto debt issued in the Eurozone has risen dramatically of late, and analysts say this is one reason the Euro will possibly remain supported over the coming months.

HSBC researchers find that significant changes in yields at both the front and back end of the U.S. and European yield curves are creating conditions for bond investors that have not been seen for over a decade.

"The big picture takeaway is that European investments appear to offer a better source of FX risk-free returns than at any point since the global financial crisis, which should propel more capital back into Europe," says Dominic Bunning, Head of European FX Research.

HSBC analysis finds a USD-based investor can earn nearly 5% annualised carry on German Bunds on an FX-hedged basis.

"This is the widest pick-up over US 10y yields since 2006," says Bunning.

A EUR-based investor meanwhile now only earns around 1% annualised by holding FX-hedged US 10y bonds, compared to earning around 2.20% on a German 10y Bund.

"Historically, these measures of FX-hedged yield gains align closely with debt flows into and out of the Eurozone. As such, the conditions favour a further reallocation of capital into the region by both domestic and foreign investors alike, even if the specific impact of FX-hedged portfolio flows on the EUR may be limited," says Bunning.

The Euro has rallied sharply since September's sub-1.0 lows as investors cheer cheaper wholesale gas prices and the reopening of China, which is one of Europe's major markets for manufacturing output.

But it is the rise in European Central Bank interest rates from negative territory - that have in turn pushed up sovereign bond yields - that has also provided support to the Euro.

The ECB has raised rates in response to decade-high inflation levels and all indications suggest further rate hikes of at least 100 basis points are due from the central bank in early 2023.

This will further aid Eurozone bond yields relative to those elsewhere and potentially underpin the rise in Euro exchange rates.

"The external position of the Eurozone, which only a few quarters ago was looking more precarious, has shown a notable turnaround and points to ongoing strength in the EUR in the months ahead, in our view," says Bunning.