The end of the decade-long dive of interest rates

After more than 30 years of lowing interest rates are breaking through the long-term downward trend and heading upwards. But will the rise in interest rates continue? And how will bond prices develop in the process?

For more than three decades, interest rates have been on a dive. They moved continuously downwards - in Europe even negatively - with little fluctuation. Then the turning point, last year, in 2022. The rise in interest rates was heralded by high and not only moderate, but exceptionally strong inflation. The magnitude of the rise gives a clear signal that the more than 30-year downward trend in interest rates is over. But will this trend last longer and what impact will it have on bond markets?

The steep rise in interest rates does have a big impact on bond prices. When interest rates rise, bond prices have to fall to reflect the higher interest rate level, because the bond coupon does not change. Since the bond is redeemed at par (out of 100), lower bond prices lead to a higher total return (coupon and bond price movement), which corresponds to the current interest rate level.

In our example, see the Linde bond (graph below) with the relationship between bond price and interest rate level running in the opposite direction. As can be seen from the chart, the Linde bond has seen a price decline of 10.4% since the beginning of 2022 because interest rates have jumped from -0.18% to +2.29%. However, this price decline is only temporary, because at the end of the term (limitation of the term until the end of 2026) the Linde bond price will approach again the issue price of 100. The price correction from 2022 is thus equalised.

Bond yields are currently attractive after the rise in interest rates. In addition, we expect interest rates to come back somewhat in the course of the year and bond prices to benefit additionally from this.

In our mandates, our bond strategy is broadly diversified and, in the case of bonds, consists exclusively of bonds with a remaining term until the end of 2026. Analogous to the example of the Linde bond, the price correction of 2022 is only temporary. We continue to adhere to the strategy of short maturities, as we expect interest rates to rise again in the longer term.

Also read our latest situation assessment for Q1 2023.

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This publication was produced by the Investment Office of the Colin&Cie Group. The information and opinions contained in this document are based on sources we believe to be reliable. However, we cannot guarantee the reliability, completeness or correctness of these sources. All information and quoted rates are only up-to-date at the time of this publication and are subject to change at any time without notice. The content is based on numerous assumptions made by the Colin & Cie Group. It should be noted that different assumptions can lead to materially different results. The forecasts and assessments are only current at the time this publication is prepared and can change at any time without prior notice. Past performance of an investment is not a guarantee of future results. Certain investments can experience sudden and substantial losses in value. This information and views do not constitute a solicitation, offer or recommendation to buy or sell investment instruments or to carry out any other transactions. We recommend interested investors to consult their personal advisor before making decisions on the basis of this document so that personal investment goals, financial situation, individual needs and risk profile as well as further information can be duly taken into account as part of a comprehensive consultation. The information contained in this publication is marketing material that is distributed for advertising purposes only.