Due to the rapid hike in interest rates, the value of portfolios containing government bonds in industrial countries has fallen by 5 to 10 percent since year-opening. Concerns over the economy have curbed interest rate rises of late.

Indexed performance of government bonds in Swiss francs

100 = 01.01.2022

The bond markets are amongst the major losers this year, due to the tighter policy adopted by the US Federal Reserve. By raising interest rates by 0.5 percent for a second time, it is increasingly focusing on reining in inflation. Two further similar interest rate hikes are expected in June and July. The Federal Reserve also looks set to start reducing the size of its balance sheet from June. In light of the slowdown in economic growth, however, the rise in interest rates has levelled off somewhat recently. Due to the weakness of the Swiss franc against the US dollar, the losses on US government bonds had less impact on Swiss portfolios that had not hedged against foreign currency risks.

Trend in 10-year yields to maturity

In percent

The yields to maturity on government bonds rose once again last month. 10-year US government bonds broke through the 3-percent barrier. The last time they reached this level was in 2018. A similar trend also emerged in Europe. Swiss federal government bonds with a 10- year term recently reached a yield to maturity of 1 percent, while their German counterparts climbed as high as 1.2 percent. This means that the cost of borrowing has increased significantly.

Credit spreads on corporate bonds

In percent

Increased risk aversion among investors due to the threat from inflation and greater economic pitfalls is also being clearly reflected on the corporate bond market. As they present a greater default risk than government-issued bonds, a risk premium is factored in. In times of greater uncertainty, this credit spread is usually wider, whereas the credit spreads being demanded narrow during calmer times, due to the risk appetite among investors. Credit spreads have widened significantly again recently. The spread on corporate bonds issued in euros and US dollars currently stands at over 1.5 percentage points once again. Swiss corporate bonds are deemed even more secure, with the spreads at just under 1 percentage point.

Rising interest rates and continuing inflation produced headwind on the equity markets. Significant price losses were recorded last month.

Indexed stock market performance in Swiss francs

100 = 01.01.2022

For a short time, it looked as though the equity markets had left the losses from the start of the Ukraine conflict behind them. But the measures introduced by central banks to combat inflation triggered another major downturn last month. Losses since year-opening stand at around 10 percent. Technology stocks have been particularly badly hit. They had made significant gains even during the coronavirus crisis.

Momentum of individual markets

In percent

The strong downward trend – driven by concerns over inflation and the economy – left no country untouched last month. The Dutch equity market was particularly severely hit by negative momentum, after its technology heavyweights suffered major losses last month. The situation on the Chinese equity market also deteriorated. This was due to concerns over the impact of tight coronavirus restrictions – around 200 million people in the cities of Beijing and Shanghai are currently in lockdown.

Price/earnings ratio

In light of the current high inflation trend and uncertain economic outlook, the potential for further corporate profit growth has been exhausted for the time being. Strong growth had been achieved over the past two years, resulting in a considerable decline in the price/earnings ratio (P/E ratio), despite high equity prices. The average P/E ratio for a Swiss company currently stands at 15, which means that the equity price is 15 times higher than profit.

Real estate investments were hit by rising interest rates last month, and their price dropped sharply.

Indexed performance of Swiss real estate funds

100 = 01.01.2022

Listed Swiss real estate funds were particularly severely hit by last month’s sell-off. One reason may be that interest rate hikes have made employee benefits institutions and other institutional investors regard government bonds once again as a more attractive asset class compared to real estate funds. Government bonds are now also yielding a positive return again in Switzerland, leading to a decline in willingness to pay for Swiss real estate funds. Their value tumbled by around 5 percent last month and has declined by 8 percent since the start of the year.

Premium on Swiss real estate funds and 10-year yields to maturity

In percent

In times of low interest in particular, investors are willing to pay a premium on the value of the properties contained in the fund. These premiums hit a record high of 50 percent last summer. Following market developments last month, however, premiums have plummeted and currently stand at just over 30 percent. This means that the valuation of Swiss real estate funds remains expensive despite the recent correction, as the current interest rate level would justify a premium of only around 25 percent.

Vacancy rate and real estate prices

100 = January 2000 (left) and in percent (right)

Higher interest rates are also making it more expensive to finance property purchases. On a Swiss fixed-rate mortgage with a five-year term, the interest rate has almost doubled from just over 1 percent last year to 2 percent now. Only short-term Saron mortgages, where the interest rate fluctuates on a daily basis, have so far remained at a low level. Fixed-rate mortgages are a more popular option in Switzerland – they predominate over Saron mortgages, with a share of over 80 percent.

Currencies

The US dollar is making up ground. The Swiss franc and Japanese yen were surprisingly weak, however.

^{Source: Web Financial Group}

The US dollar is currently heading in only one direction – and that’s up. Compared to a basket of currencies, the price of the US dollar reached its highest level for 20 years. Considering the great economic uncertainty over the outlook for the future, it’s hardly surprising that investors are seeking refuge in the global reserve currency. The two other “safe havens” – the Swiss franc and Japanese yen – fared poorly in recent times, however. The previously strong currencies of the commodity-exporting countries of Canada, Australia and Norway also had the wind knocked out of their sails last month.

Gold

The gold price resisted the downward trend on the financial markets last month and acted as an inflation hedge – to some extent, at least.

Indexed performance of gold in Swiss francs

100 = 01.01.2022

Last month’s sell-off affected almost all asset classes. Last month’s sell-off affected almost all asset classes, including gold in recent times. After briefly peaking at 2,050 US dollars per troy ounce in March, the price stubbornly remained in a range around 1,950 US dollars for some time. But the strong dollar and rising interest rates have exerted pressure recently, with the price currently standing at around 1,800 US dollars.