Interest rates have risen in the US and Europe
When reading the latest economic news, it's impossible to avoid the topic of rising interest rates. Last week, the US Federal Reserve raised its policy rate from 3.5% to 3.75%. In addition, yields on 10-year US Treasury bonds climbed above 5% in recent weeks—the highest level in almost 20 years.
Europe has also seen a steady rise in interest rates. One week before the Fed, the European Central Bank (ECB) raised its policy rate to 2.5%. Yields on 10-year German and French government bonds, at 3.5% and 4.5%, respectively, are at their highest levels since 2008.
There are multiple reasons behind the rise in interest rates: high inflation, caused by rising oil prices following the conflict in the Middle East; rising demand for capital from technology companies to finance major investments in artificial intelligence; and, last but not least, concerns about record-high government debt in many countries.
Negligible increase in interest rates in Switzerland
Swiss interest rates appear to have been largely unaffected by the rise in rates elsewhere. Yields on 10-year Swiss government bonds are around 0.5%. This is surprising, given that Swiss and German bonds were trading at similar levels as recently as 2022. Swiss interest rates are now around 3 percentage points lower.
At its meeting on 24 September, the Swiss National Bank (SNB) left its policy rate unchanged at 0%. The SNB cited persistently low inflation of 0.8% as one reason for its decision; inflation in the US and the Eurozone is more than 2 percentage points higher. The difference in government debt is similarly significant: While debt exceeds 100% of gross domestic product (GDP) in the US and many Eurozone countries, it amounts to less than 40% of GDP in Switzerland.
However, the SNB is unlikely to maintain its zero-interest-rate policy indefinitely. If capacity utilization in the Swiss economy continues to improve over the coming quarters, we expect the SNB to raise interest rates in the first half of next year. However, the capital market is already pricing in such increases, so they are likely to have only a limited impact on longer-term interest rates, such as government bond yields and mortgage rates.
The low-interest-rate environment in Switzerland is likely to persist, even on the back of higher rates in Europe and the US. Switzerland differs markedly from these regions in terms of inflation, government debt, and policy rates.
What does this mean for investors?
The low-interest-rate environment continues to benefit mortgage borrowers. Mortgage rates are closely linked to the general level and direction of interest rates, and are therefore likely to remain relatively low.
Even if interest rates rise slightly, savings-account rates are likely to remain low and, after accounting for inflation, probably be negative. The same applies to bonds.
Over the past ten years, the Swiss Performance Index generated a total return of 100%, while the S&P 500 returned 220%—both measured in Swiss francs and including reinvested dividends. Over the same period, franc-denominated savings deposits and Swiss bonds returned 1.5% and 2.9%, respectively, including interest income. Equities offer greater return potential, but also carry significantly higher risks. A well-diversified portfolio therefore remains essential.
