Uncertainty over US monetary policy led to volatility on the bond markets of industrialized nations.

Indexed performance of government bonds in local currency

100 = 01.01.2024

The rollercoaster ride on the bond markets continued last month. The main focus of attention was uncertainty over whether the US Federal Reserve would cut its policy rates. Monetary policy data from the USA, in turn, triggered sharp fluctuations on global bond markets. Concerns that the US economy would continue its strong performance, with inflation rates barely falling, were predominant until the end of May. However, the downward correction to US growth from 1.6 to 1.3  percent and the recent fall in US inflation reassured the markets recently. US government bonds gained overall during the month, whereas their European and Swiss counterparts fell slightly.             

Trend in 10-year yields to maturity

In percent

Long term interest rates in the industrial nations experienced a volatile month. In the USA, positive economic data and a high number of newly created jobs in May initially put upward pressure on long-term interest rates. However, the downward correction to US growth and another fall in inflation led to a trend reversal. The US Federal Reserve’s decision not to cut interest rates did little to change that either. As a whole, yields to maturity on 10-year government bonds in the USA declined slightly month-on-month standing at just over 4.3 percent, whereas they climbed marginally overall in the eurozone and Switzerland. 

Credit spreads on corporate bonds

In percentage points

Credit spreads remain at a low level. By historical standards, risk premiums are now actually lower than after the global financial crisis. Measured in terms of credit spreads, it means the corporate bond market remains unconcerned about a recession. However, this situation could change quickly if interest rates in the USA remain high for an extended period and there is a significant economic slowdown. 

The recovery on the stock markets in early May faltered again over the course of last month. While the market proved relatively resilient to volatility on the interest rate markets, there was still no clear positive momentum.

Indexed stock market performance in Swiss francs

100 = 01.01.2024

The equity markets proved relatively resilient to interest rate volatility last month. The high number of newly created jobs in the USA in May and, in turn, fears of restrictive monetary policy being applied for a longer period weighed on the equity markets at the end of May, although they recovered strongly in June. This upturn nevertheless faltered overall. The Chinese equity market fared very poorly last month, which, in turn, weighed on the performance of emerging market equities. This is primarily due to tensions flaring up again in the trade dispute between China and the West. By launching an antidumping investigation on chemical imports, China sought retaliation for the sharp increases in customs duties introduced by the USA on Chinese products, such as electric cars.

Momentum of individual markets

In percent

Momentum on most equity markets weakened again last month, but, despite few exceptions, remains in positive territory. The Chinese equity market in particular faltered sharply. In contrast, the Swiss equity market performed well, gaining significant momentum. The Swiss equity market has been on the road to recovery since April, due to the strong performance of index heavyweights from the pharma and food industries.

Price/earnings ratio

The price/earnings ratio on the stock markets improved slightly month on month, primarily due to the positive performance of equity markets last month as the contribution from corporate reporting has now eased off. While the chip manufacturer Nvidia wowed investors again with impressive results at the end of May, this had little effect on the overall market.

Exchange-listed Swiss real estate funds came under pressure from the rise in long-term interest rates, and have fallen in value over recent weeks. 

Indexed performance of Swiss real estate funds

100 = 01.01.2024

The value of Swiss real estate funds traded on the stock exchange declined sharply last month, mainly due to the increase in Swiss capital market interest rates. Yields to maturity on 10-year Swiss government bonds have climbed by around 15 basis points to just over 0.7 percent in recent weeks. Interest rates rising usually means a decline in the valuation of long-term investments as it causes a fall in the present value of future returns. The recent decrease brings year-to-date performance close to zero again. Real estate funds made further strong gains in the first few months of 2024, thanks mainly to higher rental income and, in turn, a rise in expected returns.

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

In percent

The premium paid by investors on exchange-listed real estate funds compared with the properties’ net asset value (NAV) has fallen again recently. As the NAV of many properties has barely changed of late, the decline is mainly due to the fall in the value of real estate funds mentioned earlier. The premium now stands at just over the 20 percent mark, which is in line with the average for the last 20 years. The premium is typically lower during phases of high interest rates, and usually slightly higher in phases of low rates.

Three-month SARON and 10-year yields to maturity

In percent

The yields to maturity on 10-year Swiss government bonds climbed slightly in May, but, at around 0.7 percent, are still well below the SARON interest rate. This situation where short term interest rates lie above long term rates is referred to as an inverted yield curve. It generally indicates that market participants expect a recession and, accordingly, a fall in short term interest rates. This is reflected in the market’s current short-term expectations, with further interest rate cuts anticipated. 

Currencies

The Swiss franc reversed its downward trend since year-opening in May, and gained in value. The Scandinavian kronas also performed very strongly. In contrast, the US dollar fell in value.

^{Source: Allfunds Tech Solutions}

After suffering a sharp fall in value from January to April, the Swiss franc staged a recovery last month, gaining by around 1.5 percent against the US dollar. The US dollar also weakened against other major currencies, after appreciating significantly in spring. The Swiss franc was up slightly against the euro for the entire month after making strong gains at the end of May.

The Scandinavian kronas appreciated significantly last month. The Norwegian krone recorded the strongest performance, gaining around 2.2 percent against the Swiss franc. Despite this rise, both the Norwegian krone and Swedish krona remain undervalued.

^{Source: Allfunds Tech Solutions, Coin Metrics Inc}

Gold

The price of gold was volatile last month. Despite falling slightly, the precious metal’s price remains at a high level of just over 2,300 US dollar per troy ounce. 

Indexed performance of gold in Swiss francs

100 = 01.01.2024

Despite falling slightly in mid-May and early-June, the gold price remains high. The precious metal’s price had risen sharply over recent months owing to the Middle East conflict. In times of uncertainty, gold doesn’t just offer protection against inflation, but is also a very secure investment generally. The slight decrease in its price in May was mainly due to the Chinese central bank not buying additional gold reserves for the time being. It had previously built up its gold reserves over several months, which supported the gold price.