Bond outlook 2025: “High interest rates will continue”

No interest rate slide in sight

The yield on ten-year German government bonds, which fluctuated between 1.93% and 2.71% in 2024, is at 2.37% on Friday morning, while the yield on ten-year US Treasuries, which fluctuated between 4.05% and 4.62% in 2024, is at 4.55%. No major changes - downwards or upwards - are expected for 2025. “For the new year, we expect ten-year Bund yields to move in a range between 2 and 2.5 percent - initially at the lower end of the range, then higher,” explains Commerzbank analyst Hauke Siemßen.

In Helaba's base scenario, the yield on ten-year German government bonds will be 2.5 percent at the end of 2025 and rather lower in the first half of the year. The yield on ten-year US Treasuries will be “well above 4 percent” towards the end of the year. “High US government debt, the risk of rising tariffs and the Fed's questioned monetary policy independence have the potential to drive up risk premiums, especially for longer maturities,” says analyst Ulf Kraus. “Particularly in the USA, strong fluctuations in yields must be expected at times.”  

Concerns about France

In addition to concerns about Trump and his potentially inflation-driving course, France is also likely to remain an issue, as Brunner suspects. In the year just ended, the risk premium for ten-year French government bonds over German bonds rose to its highest level since the financial crisis. Oechsner expects the premium to remain at around 80 basis points. “This is historically high and the potential for tightening is rather low.”

Corporate bonds: Credit rating is crucial

According to traders, the demand for “good” names in the corporate bond business is likely to continue in 2024. “Not only government bonds or government-related bonds remain attractive - the yields of all bond segments are above the multi-year average interest rates and continue to offer attractive opportunities,” explains Oechsner. “Real returns after inflation can be achieved.”

According to Jens Herdack from Weber Bank, however, the premiums paid for bonds from companies with low credit ratings have fallen to “decade lows”. “In our view, this means that the risks taken are no longer adequately rewarded. There are therefore not many attractive opportunities,” says Herdack. “The situation is challenging for SMEs, as interest rates are not falling as quickly as originally expected,” Brunner also emphasizes. This is putting pressure on margins. “The last quarterly reports were below expectations in around three quarters of cases.”

By Anna-Maria Borse, 3 January, 2025, © Deutsche Börse