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

  • The fund has achieved a performance of 1.3% in the year to date despite the global geostrategic and political environment (as of 2 July 2025).
  • Including cash, EUR interest rate exposure remained dominant at 90% of the fund’s assets under management. The USD interest rate exposure was 8%, while the GBP interest rate exposure amounted to 2%. Currency risks are almost completely hedged.
  • Technically, the hybrid market should remain supported.
  • Yields of about 4% after currency hedging costs on investment grade securities with an interest rate duration of less than four years are attractive for investors.

Fund manager Roman Swaton
(c) Stephan Huger

Fund & Performance

ERSTE BOND CORPORATE PLUS mainly invests in subordinated bonds with an investment grade rating. The focus is on hybrid bonds denominated in euros from the non-financial sector. Subordinated emissions from financial institutions are added. 

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.

Performance since start of the fund (12.12.2016). 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 Roman Swaton

How did the fund perform in the first half of 2025?

The fund has achieved a performance of 1.3% in the year to date despite the global geostrategic and political environment (as of 2 July 2025). The main drivers were:

  • current interest income – most recently, the average coupon was 3.56%; and
  • the decline in yields on German government bonds with maturities of up to five years.

Two-thirds of the fund volume will be redeemed within five years; the slight increase in yields on German government bonds with maturities of more than five years was less significant given the low exposure of only one third of the fund volume. The rise in interest rates on longer-dated German government bonds was triggered by the Bundestag's decisions to end the debt brake and to increase infrastructure and military spending. Spread changes played hardly any role in performance, although they fluctuated to varying degrees depending on the sector in light of the US tariff and trade policy.

 

What was the focus of the fund in the first half of 2025?

Following Moody's change in methodology for hybrid bonds in February 2024, issue volumes rose sharply in comparison to 2022 and 2023; five times more hybrids were issued in USD than a year earlier. However, in the fund we increased the USD interest rate exposure only to 8% because excessive US budget deficits and considerations by the Trump administration could lead to debt restructuring of US Treasuries. This would be unfavourable for foreign investors, resulting in further price corrections of these government bonds, which had previously been considered a safe haven.

Moody's responded on 16 May with a downgrade to Aa1. Including cash, EUR interest rate exposure remained dominant at 90% of the fund’s assets under management. The GBP interest rate exposure amounted to 2%. Currency risks are almost completely hedged. In terms of duration contributions, the highest country weights were Germany, Italy, the USA, and France. The three largest sectors were utilities, energy, and banks. 75% of the bonds were rated triple B.

 

What are the expectations of your fund management team with regard to global economic development and trends, among other things, for the second half?

Technically, the hybrid market should remain supported. On the primary market, we witnessed multiple oversubscriptions and the narrowing of spreads of 35 to 40 basis points compared with the initial price indication at the opening of syndicated order books. We continue to regard the extension risk (risk of maturity extension) as low. 

 

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

Although spreads appear expensive in historical comparison, the following should be borne in mind:

  • The underlying yield curve for German government bonds is deteriorating in terms of credit quality (end of the debt brake, unfavourable demographic trends, high energy costs, etc.).
  • Spreads appear cheaper compared to swap rates.
  • Technical support remains in place.
  • Traditional high-yield investors are increasingly investing in hybrids because they are losing issuers.
  • A yield of around 4% after currency hedging costs is attractive to investors for investment-grade securities with a duration of less than four years. We are maintaining our underweight position in USD interest rates.

 

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

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