Swiss franc bonds will remain an attractive investment in 2024
Published: Wednesday, Dec 27th 2023, 11:20
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After the horror year of 2022, 2023 developed positively for bond investors thanks to higher interest coupons. And the outlook for the coming year remains favorable.
The reason for this is once again interest rates - this time the cuts expected on the markets. This is because the return on bonds consists of two components: The coupon and the price change.
In 2023, first-class Swiss franc bonds have outperformed equities. The Swiss Bond Index (SBI), which serves as a benchmark for the development of the bond market, has gained more than 7.5% in the current year and is at its highest level since spring 2022. However, 2022 was also the worst year for the SBI since its launch in January 2007, with a drop of 12%.
The SBI contains more than 1,700 investment-grade bonds. This means that the bonds have a credit rating of at least "BBB" to "AAA".
Higher interest rates - higher coupons
The reason for the trend reversal was the central banks' move away from the low interest rate policy at the beginning of 2022. Suddenly, debtors on the capital market had to pay more interest for fresh money.
As a result, new bonds suddenly began to carry coupons of two percent or more. This attracted more investors who wanted to invest their money in safe bonds. Previously, the yield on interest-bearing securities had been close to zero percent or even negative in some cases for years.
Hope for lower interest rates
The interest rate hikes around the world did not fail to have an effect - inflation weakened again quickly and significantly in many countries. This led to market participants increasingly betting that interest rates could soon be cut again.
Since then, investors have had to adjust to lower yields on fixed-interest bonds again. "Two percent is already 'that was once again'," says Markus Thöny, Head of Swiss Fixed Income at Lombard Odier IM.
However, the prospect of lower key interest rates has not only triggered a strong rally on the equity markets in recent weeks - bonds with correspondingly falling yields were also in demand. However, the fact that the expectation of lower interest rates is also fueling demand for fixed-interest securities is not a contradiction in terms.
This is because the coupon is only one side of a bond's return. The other side comes from the change in market value, i.e. from price gains in the wake of falling interest rates, explains Thöny. Of SBI's annual performance, only a good one percent is attributable to the coupon, the rest is price gains.
Even more could have been earned with Confederation bonds. "By mid-December, it was almost fourteen percent," says Thöny. The long maturities acted as an amplifying lever here. In addition to purchases by institutional investors such as pension funds and insurance companies, Confederation bonds also benefited from strong demand from abroad.
Prospects remain favorable
But the train has not yet left the station, emphasizes the investment expert. Even in 2024, when the central banks are likely to cut interest rates, "nice price gains" are still on the cards. "There have been better entry points, but the market is still attractive," says Thöny.
Important here: Swiss investors should step out of the "comfort zone SBI AAA/BBB", the area of the highest borrower quality. Those who accept slight compromises in quality can achieve higher returns.
In the somewhat lower "A/BBB" sub-segment - which no longer includes Swiss confederates, for example - the quality is no longer first-class, but still "very good", says Thöny. In addition, the price fluctuations in this area are significantly lower than for Swiss Confederation bonds due to the shorter average maturities.
The "A/BBB" segment is a very good long-term alternative for investors, summarizes Thöny. Three to five years is "a good place to be."
The expert also advises investors not to invest in individual bonds due to the transaction costs involved. It is better to use fund products, which also allow the risk to be better diversified. Investments in bonds issued by financial and real estate borrowers, which have suffered badly, are also attractive, rather than industrial companies or utilities, which are already comparatively expensive.
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