Yields to maturity on government bonds have plunged to new lows owing to far higher uncertainty. Investors have also begun to avoid bonds of debtors with a poor credit rating, leading to a perceptible widening in corporate bond spreads.
Market overview: coronavirus plunges the markets into turmoil
Although the financial markets paid little attention to the coronavirus outbreak for some time, there has been a huge change recently. Volatility has increased sharply. Equity prices have suffered historic slumps and US bond yields have hit new lows. However, demand for secure currencies such as the Swiss franc and Japanese yen remains strong.
Indexed performance of government bonds in Swiss francs
100 = 01.01.2020
Despite low and even negative yields in some cases, secure, long-term government bonds have risen sharply in value over recent weeks. Prices have climbed more significantly in the English-speaking countries than in continental Europe. In the USA and UK, central banks are still able to make major interest rate cuts given their higher interest rates. They have not disappointed in this respect over recent weeks, whereas their European counterparts have not cut rates – which has had an impact on their respective price trends.
Trend in 10-year yields to maturity
Interest rates reached a new all-time low in various countries in recent days. The dramatic drop in yields in the USA indicated that the market participants already anticipated further interest rate cuts by the Federal Reserve. In Switzerland, interest rates still stand at just above the lows of last summer. Market participants clearly do not anticipate that the Swiss National Bank (SNB) has much more leeway to cut rates. As a result, the interest differential compared to countries abroad has narrowed sharply.
Credit spreads on corporate bonds
In percentage points
At the beginning of the year, credit spreads on high-risk corporate bonds reached lows similar to those seen to before the start of the last financial crisis. Turbulent conditions in recent weeks have led to investors differentiating more sharply between debtors of good and poor credit standing, which has caused a sharp widening in spreads. In these more difficult financing conditions, the transport, tourism, entertainment and oil and gas sectors are currently struggling as their earning power has been most severely hit by the coronavirus crisis.
Equity markets have seen the greatest price falls since the 2008 financial crisis in recent weeks. The VIX index, which measures volatility on the US equity market and hence is a good indicator of anxiety, climbed to a value of 75, approaching the previous high of 89 in October 2008.
Indexed stock market performance in Swiss francs
100 = 01.01.2020
For as long as coronavirus primarily affected only China, the global financial markets ignored the risk it posed. Benchmark indices in Western countries soared to new record levels in mid-February. Once it became clear that the virus was a global issue, the markets reacted quickly. Since then, Switzerland’s benchmark index, the SMI, has lost around 25 percent of its value at times within a month. The slump on the global equity markets actually totalled more than 30 percent in Swiss franc terms. Thursday, 12 March 2020, will go down in history as the day we saw the biggest price falls for over 30 years. However, there were significant recoveries on certain days too.
Momentum of individual markets
Whereas all markets posted positive momentum last month, there has been a complete turnaround since then. Momentum is currently still least negative in the nations of East Asia. In these countries, coronavirus infections have been kept within tight limits to date (Taiwan, Japan), or the number of new infections is declining (China, South Korea). In China, the government lent support by intervening in the equity market. Switzerland, in turn, is benefiting from the relatively defensive positioning of its indices.
Before the current correction, stock market valuations, as measured by the price/earnings ratio (P/E ratio), were high. Valuations were only partly justified by fundamental data as the earnings growth of companies slowed down or even stagnated. The high valuations are one reason why the market correction in recent days has been so huge. Equity markets have not just responded to the worsening economic outlook, but also corrected overvaluations of previous months.
Swiss real estate investments were also impacted by the downturn on the financial markets. After record highs in February, they have now returned to the levels seen at the end of last year.
Indexed performance of Swiss real estate funds
100 = 01.01.2020
Swiss real estate investments were also impacted by the substantially higher risks of recession and the gloomy sentiment on the financial markets worldwide. After reaching record levels in February, they fell sharply recently. This means their prices are now once again below the level at the start of the year. Prices of international real estate investments also plummeted recently.
Premium on Swiss real estate funds and 10-year yields to maturity
Even though the prices of real estate investments have fallen sharply recently, valuations remain high. The considerable increase seen last year is continuing to have an effect. Premiums – in other words, the difference between the intrinsic value of real estate and their actual market value – have fallen from highs of close to 35 to below the 30 mark. As interest has also fallen, the valuation has returned to a level that can be described as fair.
Vacancy rate and real estate prices
Apartment prices have risen slightly recently. In contrast, rental prices are likely to continue to fall over the coming months. At the beginning of March, the Federal Office for Housing decided to reduce the reference interest rate from 1.50 percent to 1.25 percent. This was the first adjustment to the reference interest rate since 2017. People in existing tenancies are now entitled to have their rent reduced accordingly.
Anxiety over the coronavirus outbreak is also unsettling the currency markets. There is strong demand for secure currencies. This is affecting the Swiss franc in particular.
Currency pair Price PPP Neutral range Valuation Currency pairEUR/CHF Price1.06 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.17 Neutral range Range of historically normal fluctuations.1.09 – 1.26 ValuationEuro undervalued Currency pairUSD/CHF Price0.95 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.0.93 Neutral range Range of historically normal fluctuations.0.81 – 1.04 ValuationUSD neutral
Currency pairGBP/CHF Price1.19 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.45 Neutral range Range of historically normal fluctuations.1.25 – 1.65 ValuationPound sterling undervalued Currency pairJPY/CHF Price0.90 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.06 Neutral range Range of historically normal fluctuations.0.91 – 1.25 ValuationYen undervalued Currency pairSEK/CHF Price9.70 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.12.08 Neutral range Range of historically normal fluctuations.10.92 – 13.23 ValuationKrona undervalued Currency pairNOK/CHF Price9.29 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.12.86 Neutral range Range of historically normal fluctuations.11.56 – 14.16 ValuationKrone undervalued Currency pairEUR/USD Price1.12 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.27 Neutral range Range of historically normal fluctuations.1.10 – 1.43 ValuationEuro neutral Currency pairUSD/JPY Price104.81 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.87.90 Neutral range Range of historically normal fluctuations.72.32 – 103.47 ValuationYen undervalued Currency pairUSD/CNY Price7.03 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.6.34 Neutral range Range of historically normal fluctuations.6.09 – 6.59 ValuationRenminbi undervalued
Source: Bloomberg, Refinitiv
The turbulent conditions have also caused great volatility on the currency markets. While the currencies of some countries rich in raw materials plummeted, demand for secure currencies rose. This applies to the Swiss franc in particular, which continued to appreciate despite interventions from the Swiss National Bank (SNB). The US dollar fell in value recently after the decisions taken by the Federal Reserve, the US central bank.
Against a backdrop of greater uncertainty on the market, the price of gold increased by 10 percent since the start of the year for a time. The value of gold has now fallen sharply again.
Indexed performance of gold in Swiss francs
100 = 01.01.2020
The gold price has fluctuated considerably recently. Gold did benefit from the demand for secure assets on some days. However, it also declined on days when stock markets slumped, which means its value is currently only slightly higher than at the start of the year. One possible explanation for why the gold price has not benefited from the uncertainty to a greater extent up to now is that market participants required liquidity and therefore disposed of some of their gold holdings. From a Swiss perspective, the fact that the value of the US dollar – the currency for trading gold – fell against the Swiss franc also had an adverse impact on the gold price.