4 Questions for Dr. Alexander Schubert, Union Investment

As a fixed income portfolio manager, covered bonds and Pfandbriefe play an important role as stable, low-risk components in the portfolios I manage. They are characterized by a cover pools of high-quality collateral, such as mortgages or public sector loans, and are additionally backed by the issuer. This dual recourse makes Pfandbriefe particularly resilient to market turbulence and default risks. Compared to government bonds, they typically offer a slightly higher yield at a comparable level of risk, which makes them an attractive asset class to boost the total return of my portfolios without significantly increasing risk.

In addition to covered bonds, sub-sovereign, agency, and supranational issuers also play an important role. Issuers from these segments likewise offer excellent credit quality and often have an international focus. While the yield of this asset class is on average somewhat lower than that of Pfandbriefe, I see its role primarily in global diversification and as a safe haven during periods of market stress.

Due to the energy price shock, economic risks are rising overall. As a result, Pfandbrief spreads relative to swaps are likely to stabilize at an elevated level or rise slightly further, particularly in the event of a sudden renewed increase in risk aversion caused by the supply shock. However, new issue premiums and high demand for safe assets generally support spread levels.

Spreads between Pfandbriefe and federal Länder are likely to remain relatively stable, as Pfandbriefe continue to be regarded as a safe and attractive source of financing due to their dual recourse and high liquidity. The uncertainty caused by high or further rising energy prices primarily weighs on the budgets of the federal Länder, which is also likely to result in slightly rising spreads for them.

Pfandbrief spreads relative to Bunds could rise slightly in the short term, as Bunds are considered the safest anchor and tend to see stronger demand amid heightened uncertainty. However, Pfandbriefe remain highly attractive due to their strong cover pool support.

Overall, a slight widening of Pfandbrief spreads is expected in the medium term, though this will remain limited by their high quality and their role as a safe source of funding.

I consider the risk of stagflation due to the war in Iran to be significant. The conflict is leading to a rise in energy prices, particularly for oil and gas, which is further driving up inflation. At the same time, rising costs and geopolitical uncertainties threaten to hamper growth, potentially slowing economic expansion significantly or even causing it to stagnate. Specifically, inflation in the eurozone could rise to around 3 to 4.4% in 2026, while economic growth comes to a near standstill. This combination— rising prices amid a stagnant or weak economy — fits the exact definition of stagflation and poses a risk to bond portfolios, as real yields come under pressure and monetary policy responses (e.g., interest rate hikes) could further weigh on the economic outlook. Overall, I would therefore recommend increased vigilance, particularly regarding duration and credit risks in bond portfolios.

Due to the war in Iran, I expect the yield curve to continue flattening slightly through the end of 2026. The conflict in Iran is leading to a significant rise in oil and gas prices, which will not immediately return to pre-crisis levels even if the conflict concludes rather sooner, as we hope it will. In light of higher energy prices, the European Central Bank (ECB) will likely adopt a restrictive monetary policy to curb inflation and avoid ending up in the same situation as in 2021/2022. This will lead to rising short-term interest rates. Geopolitical uncertainty, higher production costs, and potential supply chain issues are dampening economic growth. This limits the rise in long-term interest rates as growth expectations falter. The combination of rising short-term interest rates and stagnant or moderately rising long-term interest rates results in a flattening of the yield curve.