Bonds

New year with some familiar themes

At the political level, familiar issues remain virulent. For example, rising government debt on both sides of the Atlantic, tariff-related inflation risks in the US and the end of Fed Chair Powell’s term of office in May will continue to be topics of discussion on the government bond markets in 2026. The corporate bond segment, on the other hand, is facing the question of where opportunities can be found despite low credit spreads following a strong performance. We are therefore at the beginning of a challenging year for bonds – where do we see opportunities in this demanding environment?

Safe government bonds: steeper curves in the eurozone and US

After the Fed followed up its September 2025 interest rate cut with another two 25bps, we now anticipate only one more interest rate cut in 2026 in view of an expected US inflation rate of just under 3%. In the eurozone the ECB should also see no need for an interest rate cut in the coming months. Although prices in this region are not rising faster than the ECB’s target, positive economic surprises and an economic recovery supported by German fiscal spent suggest that there is no urgent need for monetary support. Rather, the yield curve is likely to steepen further, because unlike at the short end, the economic recovery and public debt will cause yields on ten-year German government bonds to rise moderately. We expect yields on US Treasuries to rise somewhat more sharply. As a result, neither German nor American government bonds are likely to generate attractive returns. Moving from mainland Europe to the British Isles, the picture is different. The Bank of England is likely to lower its policy rates. Despite slightly rising capital market yields, UK gilts offer the prospect of an attractive nominal return due to the relatively high level of current interest rates. However, risks around the exchange rate and inflation must both be taken into account. For euro investors, safe government bonds therefore remain unattractive across the board and are at best suitable as a hedging instrument for temporary market upsets.

Corporate bonds: cautiously optimistic

Both in the last quarter and for 2025 as a whole, corporate bonds in the investment-grade and high-yield segments once again held their own. However, risk premiums rose slightly in the wake of the recent stock market correction. At the same time, the market had to absorb a high volume of new issues, but this did not prove to be a burden as investment funds in the credit segment continued to record inflows. This trend is likely to continue in the future, as returns on fixed-term deposits are now unattractive following the ECB’s interest rate cuts and investors are increasingly looking for higher-yielding alternatives. Many are focusing on absolute returns, while risk premiums (“credit spreads”) remain unattractive and call for caution. On the other hand, several factors point to structurally lower credit spreads for euro high-yield bonds, including a higher proportion of secured bonds and a historically low interest rate risk. In the investment-grade segment, AI was the dominant theme. The three AA-rated issuers Meta, Google and Amazon alone raised more than USD100bn through bonds and private placements in the course of the year. The maturities of up to 40 years were critically questioned in relation to technological life cycles. However, investors reacted calmly to the increase in debt due to the issuers’ good credit ratings, with the result that the bonds last issued in November were in high demand. Given the continuing high level of investment demand, AI-related financing activities on the bond market are likely to remain at a high level in 2026. We remain positive about financial bonds. The ECB has recently emphasised that banks should prepare for financial shocks, with geopolitical tensions, changing trade policies and climate and natural crises playing a particularly important role as challenges. In this respect, a stress test planned for the coming months could lead to higher capital requirements for banks, which would, however, be beneficial for creditors in the long term. For more defensive investors, we also consider mortgage bonds and covered bonds to be attractive. Compared to government bonds, they offer lower volatility in negative market phases despite low-risk premiums and, in many cases, a strong credit rating with a yield advantage over high-quality government bonds.

Overall, we are therefore cautiously positive about the corporate bond markets for 2026. This is particularly true relative to government bonds, whose credit quality could come under further structural pressure due to rising public debt, weak trend growth and a lack of political will to reform. In the credit segment, on the other hand, we view temporary corrections as opportunities to selectively increase risk exposure.

Conclusion: Moderate confidence beyond government bonds

Despite unattractive risk premiums, corporate bonds offer interesting returns, and the high-yield segment has also seen structural improvements in terms of collateralisation and interest rate sensitivity. Here, we see selective opportunities similar to those offered by financial bonds. More cautious investors may also want to consider covered bonds, which offer a number of advantages over government bonds. The latter should prove their resilience in turbulent market phases, but beyond that, they remain unattractive when inflation and exchange rate risks are taken into account.