Union Connect: Bond Market Outlook - “Yield Curves Remain Steep”

Christian Kopf
Head of Fixed Income at Union Investment

Geopolitical crises often present buying opportunities, explains Christian Kopf, Head of Fixed-Income Portfolio Management, in this interview. In the current environment, corporate bonds of good to very good credit quality continue to provide a source of stability in portfolios. Emerging market securities can be added as a diversification component.

Mr Kopf, despite geopolitical tensions, fixed-income markets are holding up well. How does that fit together?

Christian Kopf: This is not a contradiction. Historically, geopolitical crises have generally created buying opportunities in fixed-income markets. Put another way: it can pay to take the other side in periods of crisis. This was evident recently in both the escalation of tariffs with the US and the Iran crisis, as reflected in the ICE BofA Euro Non-Financial Index. One exception was the rate-hiking cycle from 2022 onwards. Yet even after that, investment-grade corporate bonds recovered their losses, while government bonds moved sideways on a total-return basis or remained under pressure. We share the view that credit quality is shifting from the public sector to corporates. Sovereigns are no longer necessarily the safe haven. Companies can fulfil that role – provided their business model remains viable in the future. That is the key filter in credit analysis.

Risk Premiums on Corporate Bonds Back at Pre-Crisis Levels

ICE BofA Euro Corporate-Index

Source: LSEG, Union Investment. As at 13 July 2026.

How Should Institutional Investors Position Themselves?

Christian Kopf: We would expect a further rate hike by the European Central Bank (ECB) only if shipping traffic through the Strait of Hormuz fails to normalise. The market is already pricing in this scenario – ECB Executive Board member Isabel Schnabel's reference to a pending rate increase prompted little reaction, but remains valid. In the US, by contrast, we see rate cuts on the horizon. Overall, this results in an overweight position in euro government bonds versus US Treasuries. Our economic forecasts point to weaker growth in Europe – driven by structural factors and exacerbated by higher energy costs. Looking ahead, this implies lower euro interest rates and price potential for government bonds. We also see opportunities in the euro periphery, for example in Italy and Greece, where fiscal discipline has improved and spreads still offer scope for further tightening. We remain cautious on France, however – political fragmentation and the fiscal trajectory make us sceptical.

Do Government Bonds Still Have a Place in a Resilient Portfolio?

Christian Kopf: Yes, but a differentiated perspective is required. Debt dynamics are likely to drive term premia higher, and we do not expect a rapid reversal of this trend. There is also a structural shift: hedge funds are increasingly buying government bonds, lending them out in securities lending transactions and hedging the interest-rate risk. For German Bunds with maturities of ten years or more, yields are above the swap rate, enabling low-risk premia in the double-digit basis-point range. But hedge funds are “weak hands”. They have partly replaced central banks as buyers, but can also unwind positions quickly. In the short term, this makes government refinancing easier. In the medium term, however, it could result in heightened volatility – a risk factor that we believe many market participants still underestimate.

€12.6 trillion

At the end of March 2026, around €12.6 trillion of euro area government bonds were outstanding. Of this amount, the Eurosystem held around €2.9 trillion, or approximately 23 per cent, eight percentage points lower than two years earlier. By contrast, holdings by investors from the rest of the world (23 per cent), banks (18 per cent), insurers (12 per cent) and investment funds (11 per cent) — which also include hedge funds — increased.

Corporate Bonds Have Gained Despite Iran Turbulence. What Else Can Investors Expect?

Christian Kopf: We see virtually no further price potential. The investment case is based purely on carry, i.e. the expected return on a bond over a given period. At index level, for example, the ICE BofA Euro Corporate Index currently offers a yield to maturity of 3.7 per cent; if the general level of interest rates remains unchanged, there may also be potential roll-down effects on a steep yield curve. Spreads are tight across all rating categories, including high yield. However, we do not expect spreads to widen sharply, as corporate bonds offer attractive value retention relative to government bonds. This is likely to keep risk premia structurally lower than in previous cycles. Our baseline scenario of an economic recovery provides fundamental support for the sector, particularly investment grade. Selectivity is key: we remain cautious on the software sector due to AI-related disruption risks and see increased uncertainty in the leisure sector given the possibility of a renewed flare-up in the Iran conflict. Conversely, we prefer issuers with stable, less cyclical cash flows and moderate leverage.

Banking Sector by Far the Largest Segment – Technology Still of Limited Importance Despite Growth

Evolution of the Sector Structure in the European Investment-Grade Corporate Bond Market

Source: Bloomberg. As at 30 June 2026.

On the subject of AI: hyperscalers are taking on substantial debt. How do you assess this?

Christian Kopf: From a bond perspective, this is more of a longer-term opportunity. The key question is whether the investments being made by Amazon, Microsoft, Google, Meta and Oracle are profitable enough to justify the increase in debt. The risk is borne primarily by the companies and their shareholders. Bond investors are better protected, as the hyperscalers operate cash-flow-generative business lines beyond AI, which could be used to service part of the debt. Nevertheless, there is still a risk for the overall market: concentration is increasing, and the technology sector is gaining weight in the index. Diversification remains essential. We also ensure that bonds are not issued via special-purpose vehicles – creditors must have direct access to the issuer's operating cash flows. This is a non-negotiable criterion in our investment process.

How Are You Positioned on the Yield Curve?

Christian Kopf: In our view, yield curves are set to remain steep. Tactically, we are overweight duration. We prefer maturities between five and nine years, where we see the best balance between carry and price risk. We avoid the long end of the curve, as term premia there do not yet provide sufficient compensation for the volatility.

Yields Are Likely to Rise Moderately at the Long End

Short-Dated Yields Expected to Fall

Source: LSEG, Bloomberg, Union Investment. As at 10 July 2026. Forecasts are subject to uncertainty. Actual developments may differ.

Yield Curves Are Likely to Steepen

Source: LSEG, Bloomberg, Union Investment. As at 10 July 2026. Forecasts are subject to uncertainty. Actual developments may differ.

Any Final Thoughts on Enhancing Portfolio Resilience?

Christian Kopf: Emerging markets (EM) can serve as a diversification component. The segment is heterogeneous, but it introduces a risk profile that has little correlation with developed-market and corporate bonds. Between 2018 and 2024, the asset class attracted limited demand, following the Covid-19 crisis and the rate-hiking cycle. Aggregate EM growth remained weak for seven years. Several strong years could now follow.

Limited Moves in Risk Premia on Hard-Currency Bonds from Emerging Markets

Total Yields on EM Sovereign Bonds Remain Attractive Thanks to US Treasury Yields

Source: Bloomberg. As at 14 July 2026.

In eastern Europe, we see convergence trades towards euro pegs or even euro membership. Some African markets have also gained in importance from a capital-market perspective. For institutional investors, EM bonds can also offer attractive real yields that are now difficult to find in developed markets.

Source: Union Investment, All information, explanations and representations are as at 20 July 2026, unless otherwise stated