Despite the selling pressure in the fixed income market this Wednesday, the yield on European sovereign bonds remains downward. And at this point, it is swiss debt the one that offers the lowest returns. This week the alpine securities at different maturities approached the 0% profitability that the Swiss bond promptly lost to five years. This marks the first negative returns in Switzerland since March 2022, when interest rates were negative and before monetary policy linked to the Swiss franc was tightened.
Currently, all Swiss fixed income from three months to 40 years of maturity offers a return of less than 0.5%. There is no debt curve with lower returns in Europe. And all the sovereign bonds between one and five years are at 0.1% or even below. By way of comparison, the ten-year Swiss bond offers 0.17% compared to the German one, which exceeds 2%.
Switzerland is an anomaly in many ways in the midst of the European Union. But the evolution of the profitability of its sovereign bonds in the secondary market is moving in the same direction as the rest of the eurozone debt. The reason lies in the flexibility of monetary policy carried out by both the European Central Bank and the Swiss National Bank (SNB). But he last central bank to raise rates and one one of the first to start cutting them It will also be the first to reach its neutral rate in 2025.
According to the evolution of OIS financial assets (overnight indexed swaps which are used as a hedge against changes in short-term interest rates and to project central bank rates in the future) the Swiss National Bank could lower its reference by 50 basis points at next week’s meeting. And between June and September 2025 will place its reference at 0%. At this time, the European Central Bank will also have cut its interest rate but it would still be at 1.75% (deposit rate) according to the same estimates.
To date, the SNB’s three downward adjustments have been 25 basis points each. And inflation in the country is “comfortably” controlled, as the Swiss central bank itself expressed, between its target range of 0% to 2%. The market is now discounting a steeper path to 0% due to the latest economic data in the country and the political drift of its neighboring countries. “Combining slowing growth, a gloomy outlook for the export sector and upside risks for the franc against the euro against a backdrop of heightened political uncertainty in France and Germany, we believe the SNB to cut rates again by 25 basis points each in December and March,” comments the economist from BloombergMaeva Cousin.
All in all, the increase in bond prices (they move against yields) brings greater benefit to the investor in the case of Swiss debt than in the case of European debt. He Swiss bond yields gains of 4.8% in the year against the German at the same maturity, which remains at a price similar to that marked on January 1 (less than 0.1% is gained per price in 2024), although during 2024 European fixed income has traded with a lot of volatility.
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