Concerns over high US inflation rates and the Middle East conflict put bond markets under pressure. The recent weaker US labour market report eased the situation to some extent. However, it is doubtful this development will last, given the continued strength of the US economy.

Indexed performance of government bonds in Swiss francs

100 = 01.01.2024

Government bonds fell considerably in value until the end of April, with little progress being made on tackling US inflation and a sharp escalation of geopolitical tensions in the Middle East. However, the weaker US labour market report published in early May eased the situation again. The financial markets hope the slowdown in the previously very strong US labour market may lead inflation rates to fall to the US Federal Reserve’s targets soon. Government bonds of western industrial nations have made strong gains again since early May. After these fluctuations, monthly performance remained virtually unchanged overall.

Trend in 10-year yields to maturity

In percent

Long-term interest rates in industrial nations rose sharply again in April due to stubbornly high US inflation rates and Iran’s attack on Israel. In the USA, yields to maturity on 10-year bonds briefly climbed to almost 4.7 percent. They then dropped to below 4.5 percent on rising hopes of a US labour market slowdown. European government bonds followed a similar pattern.

Credit spreads on corporate bonds

In percentage points

After the turnaround in interest rate policy in spring  2022, credit spreads on corporate bonds initially widened considerably. However, they have displayed a clear narrowing trend since autumn  2022. This trend continued last month. Credit spreads are now low by historical standards, and well below levels typically observed during periods of economic slowdown. The corporate bond market is hardly concerned about the prospect of recession despite economic weakness in Europe and China and the fact that the US economy has peaked.

Momentum on the equity markets faltered last month due to the stagnating decline in inflation and Middle East conflict. However, there was a recovery in early May.

Indexed stock market performance in Swiss francs

100 = 01.01.2024

Like the bond market, equity markets also came under pressure in April. Both upward pressure from interest rates and the escalating Middle East conflict weighed on share prices. However, there were signs of recovery in May. They emerged on hopes that weaker US labour market figures in April will now enable progress to be made on cutting US inflation. As a result, most equity markets edged back into positive territory month-on-month. By contrast, the Chinese equity market performed very strongly. It staged a recovery last month, rising almost 10 percent.

Momentum of individual markets

In percent

Momentum on the equity markets is waning considerably worldwide. The only exception is the Chinese equity market, where momentum has risen substantially. and is now well into positive territory again. By contrast, Brazil’s equity market is performing extremely weakly once more and has displayed negative momentum since April. Measured in US dollars, it has fallen by almost 10 percent in value since year-opening.

Price/earnings ratio

The price/earnings (P/E) ratio of the equity markets remained at a similar level month-on-month. This is mainly due to the volatility of stock market prices last month. However, measured in terms of P/E ratios, equity markets have become much more expensive since the end of  2022. The P/E ratio of global equity markets is now particularly high.

The value of Swiss real estate funds fell slightly last month. However, performance has remained well into positive territory since year-opening.

Indexed performance of Swiss real estate funds

100 = 01.01.2024

Exchange-listed Swiss real estate funds were exposed to higher fluctuations last month and fell slightly in value. However, their year-to-date performance remains well into positive territory. This is mainly due to the increase in rental income, which is having a positive impact on yield expectations for real estate investments, and the decline in long-term capital market interest rates towards the end of 2023. The Swiss National Bank’s (SNB) rather surprising decision to cut its policy rate in March may also have made real estate investments more attractive.

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 has risen considerably since year-opening due to the increase in value of real estate funds and now stands at well over the 20 percent mark. Despite the positive overall performance of Swiss real estate over recent months, the premium is at a far lower level than the record highs of 2022.

3-month SARON and 10-year yields to maturity

In percent

As part of its quarterly assessment, the Swiss National Bank (SNB) decided to cut its policy rate from 1.75 to 1.5 percent at the end of March, leading to a fall in the short-term SARON interest rate. Despite this decrease, the short-term interest rate level remains well above the long-term one. Yields to maturity on 10-year Swiss government bonds now stand at around 0.6 percent. This unusual situation is known as an inversion of the yield curve. This generally occurs when market participants expect a recession and anticipate a sharp fall in the short-term interest rate level. 

Currencies

The value of the Swiss franc and Japanese yen fell again in April. The Japanese authorities actually intervened on the foreign exchange market to prevent an even greater depreciation of the yen.

^{Source: Web Financial Group}

In April, the Swiss franc continued its downward trend observed since year-opening. It lost around 2 percent against the still extremely strong US dollar, which gained by almost 4 percent in April on a trade-weighted basis. However, the Swiss franc fell less sharply in value overall than in the previous months. It dropped by around 1 percent against the euro in April, after depreciating by 2 percent on average from January to March. The Japanese yen has fallen sharply in value, hitting a low of around 159 yen to the US dollar at the end of April. The subsequent strong gains made in early May are likely to be a result of intervention on the foreign exchange market by the Japanese authorities to support the currency.

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

Gold

The gold price hit a new record high of almost 2,395 US dollars per troy ounce by mid-April. After fears of further escalation in the Middle East eased slightly, the price of the precious metal fell back again. 

Indexed performance of gold in Swiss francs

100 = 01.01.2024

The gold price continued to climb until mid-April due to instability in the Middle East and the related investor uncertainty. Israel’s retaliation against Iran was quite restrained, easing fears of much greater escalation, which led the gold price to fall. Another reason for the decline in the precious metal’s value is the strong US dollar as gold is traded in this currency. The opportunity cost of investing in gold remains high as policy rate cuts in the USA seem a more distant prospect owing to stubborn inflation.