18.02.2026
‘Is this the end?’ is the question market players might ask today, borrowing a line from the monk in the Estonian cult classic The Last Relic. No, it’s not the end. Our sacred mission has not yet been brought to a close by a lower interest rate environment.
In recent years, deposit interest rates in Estonia have fallen sharply. As recently as the end of 2023, private individuals were earning on average over 4% on deposits with maturities of up to 12 months and as much as 4.44% on longer-term deposits, but the picture today looks very different. The interest rate on a 12-month term deposit has now dropped to around 1.8%. Inevitably, this raises the question: are deposits still an attractive place to keep your money or is it time to consider alternatives? Across the market, we see that although depositors have begun searching for higher-yield opportunities, the rotation has so far been modest. Deposit volumes confirm this.
Estonian banks hold nearly EUR 10.5 billion in term deposits and as much as EUR 21.7 billion in demand deposits, i.e. money simply sitting in bank accounts. In total, deposits exceed EUR 30 billion. By comparison, the II pillar pension funds amount to nearly EUR 7 billion and the III pillar pension funds to just over EUR 1 billion. These telling figures clearly show that the vast majority of Estonians’ free capital still rests in deposits.
Deposits are simple, secure, and easy to understand. Yet in a lower-rate environment, they no longer offer sufficient rates of return for many people. This is especially true when the money is not needed in the near future. This raises the question: what alternatives exist from a conservative wealth management perspective?
One possible middle ground between deposits and equities is bonds. At their core, bonds are simply loans, albeit with a more sophisticated name, to companies, governments or organisations. An investor lends money and receives a fixed interest payment in return. It is also known when the loan or bond matures and on what terms the money will be repaid.
The key difference between bonds and a traditional bank loan is that bonds have a life of their own in the market. They can be bought and sold. Their price may fluctuate over time, depending on interest rates, the company’s financial health, and the broader economic environment. Still, the fundamentals remain the same: duration, interest, and borrower quality. In both cases, investors should look for protective clauses in the agreement in case the company’s financial position deteriorates significantly or insolvency risk arises.
Bonds may be well suited to investors who want to put their money to work with moderate risk but prefer not to monitor markets on a daily basis. This is where bond funds come into play. Purchasing individual bonds can be complicated for retail investors, as minimum investment amounts are often large and proper diversification requires substantial capital. Bond funds, by contrast, provide more affordable access to a diversified portfolio and professional management.
For Estonian investors, one such option is the LHV Euro Bond Fund, which primarily invests in euro-denominated bonds issued by large companies. The fund aims to deliver stable interest income and moderate rate of return, potentially offering an alternative to deposits. However, bond funds also involve additional risks. The LHV Euro Bond Fund has now completed its first year, delivering a rate of return of 2.71% over that period.
An important aspect often overlooked when comparing deposits and bonds is credit risk, in other words, how reliable the borrower is. Credit ratings issued by international rating agencies help measure this. Simply put, the higher the rating, the lower the likelihood that the borrower will fail to repay the loan.
Deposits are often assumed to be automatically the safest choice. This is largely because bank deposits are guaranteed up to EUR 100,000. In reality, smaller banks often carry lower credit ratings than sovereign governments or high-quality international companies in which bond funds invest. While the state deposit guarantee provides compensation, it does not change the fact that deposit interest rates directly reflect the bank’s own risk level, and today, those rates are generally low.
A diversified bond fund with an average credit rating that may exceed that of some deposit-taking banks can potentially offer rates of return comparable to or even higher than a term deposit. This makes bond funds a meaningful alternative for investors seeking a conservative approach while avoiding reliance solely on prevailing market deposit rates. Still, every investment decision should reflect personal risk tolerance and time horizon. However, it is important to understand that term deposits and bond funds are not directly comparable; with bond funds, one must take into account higher risks. Before investing, one should carefully review the fund’s prospectus and risk disclosures. As the band SADU once put it, there are many ways to invest – the choice is yours.
This is not investment advice. The investment service provider is AS LHV Pank. Read the terms and risks at lhv.ee and consult an expert.
The LHV Euro Bond Fund is managed by AS LHV Varahaldus. Review the fund prospectus and key information at lhv.ee and consult an expert. The 12-month period for rates of return presented with regard to the fund runs from 28 January 2025 to 28 January 2026. Past performance of the investment fund does not guarantee or indicate future rates of return. The preservation of the value of the sum invested into the fund is not guaranteed.
Martin Möllits, Portfolio Manager at LHV Asset Management
Check out LHV’s Euro Bond Fund
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