‘Safe haven’ is a thing of the past

Nicolas Glasek: Let's start with the US: the current administration entered the office with the stated aim of consolidating the budget deficit and refinancing some of the upcoming debt through increased tariff revenues and aggressive spendings cuts (DOGE). In reality, however, both objectives have fallen short of expectations.

The 'Big Beautiful Bill' recently passed by the House of Representatives provides for extensive tax cuts, but without any clear funding mechanism. As a result, the structural deficit is worsening, and the need for refinancing is growing. Finance Minister Scott Bessent has made it clear that the intention is to ‘grow out’ of the deficit. However, the bond market is treating this narrative with scepticism, as evidenced by rising yields on long-dated US Treasuries – a clear sign of mounting credit concerns.

This is by no means a new development. Global bond yields have been on a sustained upward trajectory since the end of the COVID pandemic. The latest movements merely represent an acceleration of that trend.

The market is sending a clear signal: Investors are demanding higher risk premiums, not only due to inflation concerns, but also because of growing doubts about fiscal discipline. Yield curves worldwide are steepening, with considerable downward pressure at the long end. There is currently no obvious end to this trend in sight, especially given uncertainty around where global central banks might intervene (‘central bank put’). In this context, the rise of credit default swap (CDS) premiums for US bonds, which have risen continuously since the beginning of the year, is a pertinent reminder. Investors can use credit default swaps to protect themselves against an increased probability of default. Higher premiums indicate a greater need for that protection.

Yields are also climbing in Japan, driven by historically high government debt and persistent concerns about growth and inflation. The result is new highs in long-term Japanese government bonds yields.

In this environment, German government bonds (Bunds) are regaining importance as a safe investment option. Although yields have also risen significantly, reaching over 3.15 per cent p.a. for 30-year maturities, they remain relatively attractive in a global comparison.

At WowiVermögen (share class A ISIN: DE000A2QCXC4 / share class P ISIN: DE000A3D05A7), we are focusing deliberately on quality and risk control. Our bond portfolio currently consists primarily of investment-grade corporate bonds, with an average remaining maturity of about three years. This is supplemented by mortgage bonds and short-term government bonds.

The portfolio carries an average coupon of around 2 per cent per annum, providing an attractive natural yield and stabilising it against market fluctuations. Our strategy is to collect credit risk premiums for high-quality corporate bonds, while keeping the duration relatively short at around three years, to protect our investors from fluctuations and temporary price losses.

Conclusion:
The bond markets are undergoing a profound structural shift. Those who act prudently and proactively can capitalise on the attractive opportunities this environment presents, provided they focus on quality, short maturities, high liquidity, and disciplined diversification.