The declining yields to maturity on government bonds reflect the pessimism of market participants. The risk assessment for corporate bonds remains unchanged.
Market overview: Divided financial markets
The equity markets continue to reflect hope of a rapid recovery from the coronavirus crisis. However, the rising equity indexes are based largely on the dynamism of just a few sectors. At the same time, falling capital market interest rates are leading to positive returns on the bond markets. Gold has also made further gains recently, exceeding the USD 1,800 mark.
Indexed performance of government bonds in Swiss francs
100 = 01.01.2020
Bond and equity markets often follow opposite trends. Recently, however, the bond market has made gains, while equity markets have also performed strongly. The divergence points to a different market assessment. While equity prices returned to almost pre-crisis levels, the falling yields to maturity on government bonds indicates a more pessimistic view of the situation. This trend is particularly evident on the US bond market.
Trend in 10-year yields to maturity
The interest rates adjusted for inflation forecasts – known as real interest rates – fell to new record lows in many countries. In the USA, the decline in recent weeks amounted to around 0.3 percentage points. As a result, yields to maturity on ten-year government bonds also fell there. The large-scale bond-buying programmes of the US Federal Reserve (Fed) have also contributed to falling interest rates. The Fed recently failed to rule out the possibility of a yield curve control mechanism, but highlighted the drawbacks of this policy, which means it is not expected to be introduced in the short term.
Credit spreads on corporate bonds
Investors’ perception of risk is generally reflected in the interest rate differential between secure government bonds and higher-risk corporate bonds. The spreads – in other words, the premium on higher-risk bonds – have stabilized quickly after the sharp rise in March. Risk assessments on both corporate bonds and emerging market bonds have barely changed over recent weeks. Only credit spreads on high-interest corporate bonds rose slightly again.
The equity markets continued their recovery last month, but proved volatile. The momentum is being driven by only a few sectors.
Indexed stock market performance in Swiss francs
100 = 01.01.2020
The upward trend on the global equity markets also continued over recent weeks. Swiss equities climbed by 4.7 percent last month, while emerging markets, including China, recorded an 8 percent increase. Large technology companies which are also known as FANG+, benefited from a particularly strong boost. A look at the VIX volatility index confirms that market uncertainty remains high.
Momentum of individual markets
Stock markets around the world recovered rapidly from the slump in March. In almost all countries, the leading indices are already well above the trend of the last 200 days. The momentum shown here is therefore in positive territory. The United Kingdom and Australia are exceptions to this. In both countries, commodity companies and financial stocks have a high weighting in the leading index. Their low prices put pressure on the momentum. The Chinese equity market, on the other hand, has outperformed all other emerging markets in terms of returns since the beginning of the year and especially in the last month.
The extent of the coronavirus slump is becoming increasingly clear as the first company figures for the second quarter are published. Analysts anticipate a decline in profit of 44 percent year-on-year for the USA. This will also be reflected in the equity market valuation measured by P/E ratio and will make equity prices appear even more expensive.
Swiss real estate funds are under pressure despite falling capital market interest rates. Uncertainty over the future demand trend is holding investors back from buying.
Indexed performance of Swiss real estate funds
100 = 01.01.2020
The prices of listed Swiss real estate investments continue to waver. While they recovered quickly from the sell-off in March, they have now been trending sideways for several weeks and still stand at around 3 percent below their level at the start of the year. The further recent falls in capital market interest rates also seem to have failed to arouse investor interest. Uncertainty over the future demand trend is clearly playing a role. It is not just the uncertain economic outlook that is influencing this uncertainty, but also the trend towards remote working. This makes investment in commercial property in particular less attractive.
Premium on Swiss real estate funds and 10-year yields to maturity
Contrary to expectations, the further recent falls in capital market interest rates have sparked little momentum on the real estate market. The premium on properties contained in Swiss real estate funds is currently fluctuating around a value of 20 percent. The premium trend usually runs contrary to interest rate developments. This is currently not the case, however, despite central banks worldwide giving assurances that they will maintain their low-interest policy in the long term.
Vacancy rate and real estate prices
It is already clear that the coronavirus crisis will not leave the real estate market unscathed. The trend towards working from home was given a major boost by lockdown measures. This raises the question of whether the change in working practices will have a negative impact on demand for commercial and office properties over the medium term. While price expectations for residential properties are cautiously optimistic, the outlook for commercial properties is more pessimistic.
The uncontrolled spread of coronavirus is having an adverse impact on the prices of South American currencies. By contrast, commodity currencies are benefiting from higher oil prices.
Currency pair Price PPP Neutral range Valuation Currency pairEUR/CHF Price1.08 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.21 Neutral range Range of historically normal fluctuations.1.13 – 1.30 ValuationEuro undervalued Currency pairUSD/CHF Price0.95 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.0.95 Neutral range Range of historically normal fluctuations.0.83 – 1.07 ValuationUSD neutral
Currency pairGBP/CHF Price1.19 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.44 Neutral range Range of historically normal fluctuations.1.24 – 1.65 ValuationPound sterling undervalued Currency pairJPY/CHF Price88.08 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.106.68 Neutral range Range of historically normal fluctuations.92.42 – 126.14 ValuationYen undervalued Currency pairSEK/CHF Price10.41 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.12.21 Neutral range Range of historically normal fluctuations.11.02 – 13.40 ValuationKrona undervalued Currency pairNOK/CHF Price10.16 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.13.09 Neutral range Range of historically normal fluctuations.11.72 – 14.46 ValuationKrone undervalued Currency pairEUR/USD Price1.14 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.1.27 Neutral range Range of historically normal fluctuations.1.11 – 1.44 ValuationEuro neutral Currency pairUSD/JPY Price107.30 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.89.24 Neutral range Range of historically normal fluctuations.73.40 – 105.08 ValuationYen undervalued Currency pairUSD/CNY Price6.99 PPP Purchasing power parity. This measurement determines an exchange rate based on relative price performance.6.41 Neutral range Range of historically normal fluctuations.6.15 – 6.67 ValuationRenminbi undervalued
Source: Web Financial Group
The recovery of the oil price over recent weeks has boosted commodity currencies, especially the Norwegian krone, the Australian dollar and the New Zealand dollar. South American currencies have come under greater pressure due to the spread of coronavirus there. There has been less demand from investors for safe havens, such as the Japanese yen and US dollar, reflecting the more optimistic market mood.
Uncertainty over future economic development and the risk of rising inflation rates over the medium term are causing gold prices to rise.
Indexed performance of gold in Swiss francs
100 = 01.01.2020
Gold remains the highest-yielding asset class since the start of the year, with a price gain of over 16 percent. The precious metal recently exceeded the mark of USD 1,800 per fine ounce. Only in 2011 was the price briefly higher. Its popularity reflects general economic scepticism amongst investors – in contrast to the optimism on the equity markets – and a hedge against higher inflation rates, which are feared due to the huge interventions by central banks.