Upward pressure on capital market interest rates
The main factor contributing to the financial markets’ mood swing was the interest rate turnaround initiated by the US Federal Reserve (Fed). In mid-September, the Fed lowered policy rates for the first time in this economic cycle, by a full 50 basis points. It also held out the prospect of further interest rate cuts this year and next, announcing that it would do everything possible to prevent the US economy from cooling down too much. The concerns about an economic slowdown implied by this announcement had only a temporary impact on market participants.
Elsewhere, economic data published last month suggest continued robust growth in the US economy. And the slowdown on the US labour market has not continued. Against this backdrop, long-term interest rates rose significantly despite the interest rate turnaround. In mid-September, 10-year US government bonds were still yielding 3.7 percent. They are now at over 4.2 percent. This upward pressure spread to capital market interest rates in other industrial nations. At the same time, corporate bond spreads narrowed significantly last month and are at a level that would tend to indicate good economic times. By contrast, the mood among US companies continues to paint a gloomy economic picture. It means long-term interest rates in the USA have a higher downside risk, which is why we continue to favour US government bonds over Swiss bonds.