Fixed Income returns more than it yields
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Article Type
Insights
Topic
Opinion
Published
September 30, 2025
Read time
6 mins
Authors
Gerard Moerman
Luca Ferramosca, CFA
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A Changing Yield Curve Landscape

 

One of the most notable shifts in fixed income markets over the past year has been the transformation in the shape of the yield curve. This article explores the nature of that change, the underlying drivers, and its implications for expected returns across fixed income asset classes.

 

Chart 1 illustrates the German yield curve at the end of August for both 2024 and 2025. In 2024, the curve was inverted—an unusual scenario where short-term rates exceeded long-term yields. Specifically, money market yields were higher than the yield on 10-year German government bonds. Historically, this has been rare: since the inception of the euro, the 3-month Euribor has exceeded the 10-year German yield only about 13% of the time. Since then, the curve has normalized and steepened.

 

German Yield Curve

Chart 1: German Yield Curve. Data as per Aug-2025. Source: Bloomberg. Data as per Aug-2025.

 

Key Drivers Behind the Shift

Two primary factors have contributed to the re-steepening of the yield curve:

 

  1. Monetary Policy Easing

The European Central Bank (ECB) has been actively lowering interest rates. After peaking at 4%, the ECB reduced its deposit rate by 200 basis points throughout 2024 and 2025. This easing has driven down front-end yields, such as the 3-month Euribor and 2-year German rates.

 

  1. Increased Bond Supply

A few years ago, the market faced a shortage of high-quality bonds due to low debt levels and the ECB’s quantitative easing (QE) program, which absorbed a significant portion of sovereign issuance. Between 2015 and 2022, the tradable share of German government bonds fell from 70–80% to just 30%. However, since mid-2022, quantitative tightening (QT) and increased net issuance have reversed this trend. With QT continuing and sovereigns ramping up spending—particularly for the energy transition and defense (following NATO’s commitment to allocate 5% of GDP)—bond supply is expected to remain elevated. This increase in supply contributes to a higher term premium, especially for longer-dated bonds.

 


The Impact of a Steeper Curve

A steeper yield curve introduces the potential for roll-down return—the price appreciation of a bond as it moves down the curve toward maturity. If interest rates remain stable, the bond’s yield declines over time, resulting in a price gain. This effect enhances total return beyond the bond’s initial yield.

 

3M Roll-down return (in bps)

Chart 2: 3M Roll-down return (in bps). Source: Aegon AM, Bloomberg. Data as per Sept-2025.

 

This effect is even more pronounced for sovereign bonds with higher yields than Germany—such as those from the Netherlands, France, or Spain—due to the additional steepness from their spread curves. Similarly, credit bonds (both investment grade and high yield) benefit from upward-sloping curves, as their spread curves also tend to be positively sloped.

 

Looking Ahead: Yield Plus Price Return

As discussed, the expected return for fixed income assets with duration is notably higher in an environment with upward-sloping yield curves. This is the essence of the article’s title: fixed income returns more than it yields. The total return comprises both the yield and the expected price appreciation, assuming the curve remains stable.

 

In our recently published long-term outlook, we consider a comprehensive set of factors to estimate expected returns over the next four years. A key assumption in our analysis is that yield curves will remain upward sloping during this period. As a result, roll-down return is expected to remain a meaningful contributor to total return across government bonds, investment-grade credit, and high-yield corporate bonds.

 

Portfolio managers across the liquid fixed income space actively integrate these dynamics into their investment strategies, ensuring portfolios are positioned to capture the full spectrum of return opportunities.

 

 

Disclaimer

Authors

Gerard Moerman
Head of Liquid Assets, Continental Europe
Gerard Moerman, PhD, is head of fixed income, LDI and investment solutions.
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Luca Ferramosca
Portfolio Manager
Luca Ferramosca, CFA, is a portfolio manager with a focus on sovereigns. Prior to his current role, he worked as an institutional sales analyst at Aegon AM. 
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