Government bond markets in Europe have shown a muted response to recent news of a potential peace deal in Ukraine, as investors remain focused on expectations that the European Central Bank (ECB) will keep monetary policy on hold.

However, one element of the proposed plan has drawn attention: the suggestion to use frozen Russian assets to fund Ukraine’s reconstruction, with 50% of profits directed to the U.S. and Europe contributing an additional $100 billion toward rebuilding efforts.

“While the last word on this point has, of course, not been spoken, this would increase the unfunded reconstruction bill for Europe, arguing for more long-end steepening,” said Christoph Rieger, rate strategist at Commerzbank. He added that the fiscal expansion is expected to raise funding requirements significantly, which typically pushes ultra-long bond yields higher relative to shorter maturities — a process known as curve steepening.

Yet, Citi analysts caution that the U.S. proposal may be unacceptable to European authorities, as most frozen Russian assets are held by Europe at Euroclear. They suggest a more feasible alternative: a swap of Russian assets for zero-coupon EU bonds, which could be rolled off indefinitely without increasing EU funding needs.

“Even so, these developments could increase the likelihood of the EU implementing its plan to utilize frozen Russian assets, given the initial U.S. proposal,” Citi analysts noted.

The market’s cautious reaction underscores the complexity of reconciling ambitious reconstruction funding with European fiscal constraints, leaving bond investors focused on ECB policy signals and long-term debt sustainability rather than immediate geopolitical headlines.