6 questions for Bernd Meyer, Chief Investment Strategist Berenberg

In my view, ‘sell-off’ is too strong a term. At the beginning of September, there was a correction in bonds in Europe, but it was less than one per cent in most bond segments. The markets are once again questioning the long-term sustainability of French government debt, as it became increasingly apparent that France’s now former Prime Minister François Bay-rou would not be able to implement his planned savings of €44 billion in the 2026 budget. This fuelled fears of a renewed euro debt crisis.
In the US, on the other hand, following Fed Chairman Jerome Powell’s dovish U-turn at the Jackson Hole symposium of central banks, more interest rate cuts were priced in and bond yields fell.

In view of the inexorable rise in government debt worldwide, there is a growing likelihood that fears about debt sustain-ability will continue to arise in the markets, long-term bond yields will rise and yield curves will steepen. We will probably have to prepare ourselves for this. If politicians fail to pursue sustainable fiscal policies, pressure will eventually build up on the capital markets to bring about change. Some Bond investors, known as bond vigilantes, protest against monetary or fiscal policies they consider inflationary and irresponsible by selling bonds, thereby pushing up yields. The UK already had its ‘Liz Truss moment’ in 2022 and is currently under pressure again. The periphery of the eurozone had its sovereign debt crisis in the early 2010s. And in the 1990s, bond vigilantes forced then US President Bill Clinton to adjust his policies in order to stabilise public finances.

First of all, it is a good sign that the markets are differentiating between the government bonds of the various eurozone countries according to their credit standing and budgetary policy. Increased yield spreads for ten-year government bonds in the eurozone thus reflect the markets’ different assessments of the risk, creditworthiness and economic stability of individual countries. This increases the pressure on countries with higher funding costs to implement structural changes. In my view, the markets are and will remain an essential source for adjustment with a disciplinary effect on fiscal policy. It would be detrimental to assume that the ECB or the sovereign community would intervene in an emergency. This would create false incentives and open the door to misguided action. For investors, the yield differences can also provide opportunities. They must form their own opinion as to whether the respective yield differences are justified.

Given the increasingly expansionary fiscal policy in Germany as well, I would not rule that out. However, I consider this to be very unlikely in the foreseeable future. Even taking into account the infrastructure and defence package, the International Monetary Fund forecasts that Germany’s debt-to-GDP ratio is likely to remain well below 80 per cent in 2030. The average forecast for the eurozone is just over 90 per cent, for the UK a good 105 per cent and for the US and France around 130 per cent. Before covered bonds will become more expensive than government bonds in Germany, other countries are likely to have encountered distictly different challenges.

In our multi-asset strategies – both in funds and in discreationary wealth and asset management mandates – Pfandbriefe and covered bonds have been a significant part of our allocation to European bonds for some time now. When it comes to top quality bonds, we prefer them to sovereign bonds. Our preference is based, on the one hand, on a yield advantage of currently up to 0.4 per cent compared to government bonds with the same rating and, on the other hand, on the secure nature of this asset class. Covered bonds benefit from double protection in the event of insolvency thanks to the additional real estate collateral. In over 200 years of history, not a single European covered bond has defaulted, not even during the European peripheral crisis, when Greek government bonds, for example, had to be restructured with a haircut of over 50 per cent.

Yes, in our view, the ECB has completed its interest rate cutting cycle. We had already assessed this before the ECB meeting on 11 September, as we expect the eurozone economy to recover after trade disputes will have subsided in late autumn. At the press conference, ECB President Christine Lagarde dampened the market’s remaining hopes for interest rate cuts by pointing to surprisingly high economic growth and downplaying the long-term inflation forecast of below two per cent.

The Fed is currently between a rock and a hard place. On the one hand, the labour market in the US is cooling down, while on the other hand, the increased tariffs are slowly being felt in prices. Unemployment has risen slightly – from 4.1 per cent at the end of 2024 to 4.3 per cent in August. Following further revisions, the number of new jobs created in the last two months is likely to be in negative territory. That is why the Fed is likely to continue lowering interest rates. However, as tariffs will push US inflation above three percent in fall, the Fed can only lower its key interest rates cautiously, presumably by just another 25 basis points by the end of the year following the move on September 17. Given the ongoing inflationary pressure, this is likely to be the last interest rate move.

At 2.8 per cent. Even though the yield curve is already significantly steeper again, the yield spread between ten-year and two-year German government bonds is still some 15 basis points below the historical average. With ECB interest rates unchanged and the fiscal-driven recovery of the German economy that we expect, yields are more likely to rise than fall from their current level.