In a nutshell
Safe government bonds with regionally varied prospects; German Bunds are becoming more attractive.
European corporate bonds remain interesting, especially in the high-yielding financial sector.
Emerging market bonds are benefiting from hopes of peace in Ukraine and an economic recovery in China.
Global swell, stability anchor ECB
Amid a whirlwind of changes of government (US, Germany), increasing protectionism, geopolitical realignments and rising defence budgets, at least one thing has proven reliable so far this year: the ECB’s key interest rate trend. In March, it made a further cut of 25bp. While this helps the bond market in general, individual bond segments are influenced by different factors in particular. How do we see the coming months?
Safe government bonds: Germany and the UK more attractive again
In 2024, there was nothing to be gained from government bonds with high and the highest credit ratings, but the picture has brightened in the first quarter of 2025, at least for US Treasuries. They rose against the backdrop of waning US economic optimism. It is questionable whether this trend will continue, because higher tariffs, wage pressure due to the expulsion of migrants and rising national debt suggest that US yields will rise again in the medium term. In addition, the Fed has little room for manoeuvre in terms of monetary policy due to inflation, which is likely to remain well above the Fed’s target for the reasons mentioned above. Our economists expect the US key interest rate to remain unchanged for the rest of the year. In the eurozone, by contrast, falling energy prices, among other things, should allow the ECB to cut interest rates by a further 25bp in June. In addition, the prospect of additional debt-financed defence and infrastructure spending has recently caused the yield on German Bunds to rise significantly. In contrast to US Treasuries, we see positive yield potential here until the end of the year, as we do for British Gilts. So the outlook for investments in Europe has also brightened in the market for safe government bonds.
Forecasts: Key interest rates and government bond yields (in %)
Berenberg and consensus forecast in comparison, values at the end of 2025 and mid-2026
Safe government bonds: German Bunds can be worthwhile
Past and expected performance of 10-year government bonds, overall effect of yield/price change, coupon yield and roll-down effect
Corporate bonds: Solid as a rock
Corporate bonds remain solid as a rock. Neither the previous sharp decline in risk premiums nor the ongoing US tariff discussions have so far led to a sustained increase in risk premiums in this segment. With Bund yields averaging 2.6%, corporate bonds in the investment grade and high-yield segments remain attractive for yield buyers – especially since their current interest rate is well above the German inflation rate of 2.3% and thus continues to offer real added value. However, in view of the low-risk premiums, a market correction has become more likely. This should only be short-lived, however, since technical factors, such as sustained inflows of funds into investment funds from this segment, should result in stable demand. In addition, the ECB’s monetary policy could make corporate bonds more attractive relative to overnight and time deposits, appealing to additional groups of buyers. Below the surface, we continue to prefer financial bonds to industrial bonds. We like their solid capital base and reinvigorated earnings power, coupled with higher yields and better credit quality.
Corporate bonds offer a consistently positive real return
Yields on euro investment grade (IG) corporate and high yield bonds offer added value after deducting the expected German inflation rate
Emerging market bonds: Chinese economic recovery provides support
The markets for emerging market bonds are focusing on the uncertainty surrounding the protectionist measures of the new US administration and the increasing speculation about a peaceful solution for Ukraine. While the tariff threats are keeping markets on tenterhooks and leading to stronger price fluctuations, a potential peaceful solution could become a positive catalyst for emerging markets, particularly in eastern Europe. Whether and under what conditions this will come about remains to be seen. Nevertheless, the mere start of such talks is positive for the market. Eastern European currencies – including the Polish zloty, the Hungarian forint and the Czech koruna – could continue to benefit in particular from the expectation of falling energy prices. On the other side of the continent, the focus is on China. The country, which has been struggling with structural economic problems for years, was recently able to demonstrate its resilience not only through DeepSeek – economic data such as lending have also recently given hope that the economy is bottoming out to a certain extent. Equity investors had already rushed ahead and gave the Hang Seng Index the world’s strongest stock market performance since the beginning of the year. A strengthening Chinese economy has historically been a boon for the global economy, particularly for emerging markets that typically have large trade flows with China. The resulting tailwind should support all emerging market asset classes over the medium term and thus also help the bond sector.
Lending supports risk premia for emerging market bonds
A recovery in Chinese lending (right) should lead to tighter spreads in emerging market bonds, as seen before the Covid pandemic
Conclusion: Opportunities in all segments under review
In the context of geopolitical influences, safe government bonds are under the spell of rising national debt, which is likely to remain an important factor on both sides of the Atlantic for the time being. In view of the market reaction that has already taken place, the further outlook for German Bunds has improved – they offer more interesting prospects than US government securities. In view of their yield levels, euro-denominated corporate bonds continue to offer attractive opportunities, particularly in view of the (lower) inflation rate – the expected depreciation of money can be more than compensated for. Within the segment, we favour securities from the financial sector. In the emerging markets, eastern European issuers offer opportunities against the background of a possible peace solution in Ukraine, especially in local currency. In Asia, it is also hoped that China’s economy could strengthen, thereby giving new impetus not only to its own country, but also to emerging markets linked to it through trade.
Authors
Martin Mayer
Martin Mayer, CEFA, has been working as a portfolio manager since 1998. Since November 2009, as Senior Portfolio Manager at Berenberg, he has been responsible for the pension strategy of private asset management and for individual special mandates. After completing his training in business administration (Wirtschaftsakademie) and his degree in economics (University of Hamburg), he joined Deutsche Bank's asset management department in 1998. Until 2008, he managed individual client portfolios for Private Wealth Management and completed further training as a CEFA investment analyst/DVFA in 2001/2002. Mayer joined HSH Nordbank in the summer of 2008 as Deputy Head of Portfolio Management.
Martin Mayer
Senior Portfolio Manager Multi Asset
Felix Stern
Felix Stern joined the Asset Management division of Berenberg in 2000 as a fixed income portfolio manager. Currently he is heading the fixed income selection team within the Asset Management and is responsible for institutional mandates. As a senior portfolio manager he is responsible for the selection of corporate and financial bonds as well as short-term bond market investments. He is also the lead manager for several of Berenbergs institutional mutual funds. Prior to joining Berenberg, he worked several years for the Market Research department of British American Tobacco, Germany. Felix is a CCrA - Certified Credit Analyst (DVFA) and also has a German Diploma in business economics from the Fernuniversität in Hagen.
Felix Stern
Head of Fixed Income Euro Balanced
Wei Lon Sung
Wei Lon Sung has worked in fixed income portfolio management at Deka Investment since 2018, with a focus on emerging markets. He joined Berenberg in 2023 and contributes his expertise in the fundamental selection of emerging market bonds in local and hard currencies. He holds a Bachelor and Master of Science in Mathematics from Goethe University Frankfurt.
Wei Lon Sung
Head of Fixed Income Emerging Markets