Discussions regarding customs tariffs and geopolitical tensions were the main focus in the first six months of the year on the financial markets. Where are the markets headed in the second half of 2025?

In our Funds check series, fund managers from selected funds look back on the past year's performance and give their assessment of what we can expect for the rest of the year. (Please note that forecasts are no reliable indicator of future performance and that investing in securities involves risks as well as opportunities.)

Summary

  • Review: Austrian mortgage bonds contributed positively to the performance due to the narrowing yield spread to Austrian government bonds.
  • Outlook: weak economic growth in the Eurozone suggests that the ECB will cut interest rates at least once more, which should continue to support the bond market.

Fund manager Helwig-Dieter Ziering
(c) Daniel Hinterramskogler

Fund & Performance

ERSTE BOND COMBIRENT primarily invests in government bonds denominated in euros that are issued or guaranteed by issuers from Europe and that are mainly rated in the investment grade segment (or a comparable segment) by recognized rating agencies in terms of their creditworthiness. Ecological and social factors as well as corporate management factors are integrated into the investment process.

Note: Please note that an investment in securities entails risks in addition to the opportunities described. Past performance is not a reliable indicator of future performance.

The performance is calculated in accordance with the OeKB method. The management fee as well as any performance-related remuneration is already included. The issue premium which might be applicable on purchase and as well as any individual transaction specific costs or ongoing costs that reduce earnings (e.g. account- and deposit fees) have not been taken into account in this presentation.

Commentary by fund manager Helwig-Dieter Ziering

What sort of conclusion do you draw from the first half of 2025?

Due to the very slow decline in the inflation rate in the first few months of 2025, the capital market was driven by a weak economic environment and only slightly declining inflation rates in the Eurozone. Although inflation remained slightly above the ECB's target of 2% in the first months of the first half of 2025, despite a slight downward trend, the central bank cut the deposit rate in four steps by a total of 1 percentage point to 2.0% by the beginning of June 2025 in order to stimulate the very weak economy. In this market environment, yields on 10Y German government bonds rose only slightly to about 2.61% from January to the beginning of July 2025, while yields on 2Y German government bonds ended up lower than at the beginning of the year at about 1.86%. Volatility in government bonds remained above average throughout the reporting period, mainly due to growth concerns and trade uncertainty caused by US tariff policy.

 

What were your priorities in this environment?

We continuously adjusted the average remaining term of the fund to reflect the monetary policy and economic environment. We maintained a portfolio consisting primarily of Austrian mortgage bonds in order to benefit from the attractive interest rate differential between German and Austrian government bonds. However, we have reduced this share slightly from around 10% of the fund's assets at the beginning of the year to around 8% most recently, after the interest rate differential to Austrian government bonds had narrowed as expected, thereby making a positive contribution to the overall performance. In this market environment, ERSTE BOND COMBIRENT achieved a performance of 0.8% in the first six months of the year (as of 2 July 2025).

 

What do you expect for the rest of the year?

In view of the subdued economic growth in the Eurozone to date – despite key-lending rate cuts already implemented – and the lack of positive forecasts for 2025, as well as the now declining but stable inflation rates, we continue to expect further interest rate cuts. Accordingly, at least one further interest rate cut by the ECB is currently expected for the remainder of 2025, which should continue to support the bond market. (Please note: forecasts are no reliable indicator of future performance.)

 

What are your priorities in the fund, based on your expectations?

Building on this, the corresponding strategic focus of ERSTE BOND COMBIRENT will continue to be on managing the longer-term segment and the yield curve in the second half of 2025, as well as managing country weightings within the Eurozone. The proportion of mortgage bonds, which currently stands at around 8%, is also likely to be reduced further in the second half of 2025 due to the now significantly reduced interest rate differential compared with Austrian government bonds.

 

Please note: investing in securities involves risks as well as opportunities.

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