Record-high inflation rates are forcing central banks to raise interest rates dramatically. This has led to a sharp rise in yields. Inflation – triggered by the consequences of the coronavirus pandemic and the Russian invasion – has brought the phenomenon of negatively yielding bonds to a halt within a very short time. (negative interest rates – threatened with extinction (zkb.ch))
Switzerland is also struggling with a rise in inflation
In June, inflation reached its highest level in three decades at 3.4%. Inflationary pressure is therefore still significantly lower than in neighbouring countries, but this did not prevent the Swiss National Bank (SNB) from raising the key interest rate in June by half a percentage point from -0.75% to -0.25%. It has also promised further interest rate hikes if inflation continues to exceed 2%.
Government and corporate bonds are affected
The current market turbulence has not only led to an increase in government bond yields, but has also significantly changed the environment for corporate bonds. The year 2022 will increasingly be characterised by economic uncertainties the longer this continues. This is why creditors are now demanding higher credit premiums, which increases the yields on corporate bonds. In addition, high inflation reduces purchasing power and devalues consumer savings. Consumer sentiment is declining and consumers are holding back on purchases, which in turn is putting pressure on companies' sales and profit expectations.
Changes in yields and credit risk premiums
A corporate bond can be divided into two risk dimensions: interest rate risk and credit risk.
Interest rate risk refers to the dependence of a bond's return on the change in interest rates. Chart 1 shows the development of the yield to maturity (annualised yield achieved by an investor when holding the bond to maturity) for bonds with various remaining maturities. While the yield to maturity of a 10-year Swiss government bond was still -0.11% at the beginning of the year, the value at the end of June was over one percent.