The bond return to form

Swiss long rates rose sharply in 2022, ending the year at around 1.5%. This brutal rise was motivated, in particular, by soaring inflation.

After remaining in negative territory for more than three years, Swiss long rates (the yield on 10-year Confederation bonds) rose sharply in 2022, ending the year at around 1.5%. Close to the highest of the last ten years, these yields restore the attractiveness of a long-forgotten asset class.

No more negative rates and free money.

This sharp rise in yields, which drove down bond prices, was driven by soaring inflation and the reversal of monetary policy by the Swiss National Bank (SNB). No more negative rates and free money. Short rates are positive and could rise further. Indeed, faced with inflation flirting with 3%, the SNB, whose mission is to maintain price stability, will have no alternative but to raise the cost of money again (to 1% currently).

The monetary policy changes in question

These changes in monetary policy have repercussions on bondholders. While they mainly influence the yields offered by short-term borrowings, they also reinforce those of long maturities, maturities that are very sensitive to the economic outlook and inflation. Although the latter was racing last fall, it is showing signs of easing, benefiting from the ebb in energy prices and the slowdown in global growth. Its decline will not occur without hitches which could still temporarily push long-term rates upwards.

The yields offered by Swiss franc bonds are largely positive

Despite these uncertainties, let’s keep in mind that the yields currently offered by Swiss franc bonds are largely positive and are at levels not seen for more than a decade. Investing in it, in a diversified manner, is thus finding renewed interest, especially in short to intermediate maturities, which offer returns close to 2%. This compensates, at least partially, for the erosion of purchasing power.

Article published in 24 Hours, January 23, 2023