What might 2025 have in store for Swiss bonds?

In a comparison of the annual performance figures for Swiss bonds and Swiss equities over the last three years, two things stand out. First, the differences between bonds and equities are rather small; second, the values for bonds are rather large.

FIG 1. Annual performance of Swiss bond indexes and Swiss equity index (SMI)¹  

How is it possible for Swiss bonds with average yields to maturity of well below 2% to have achieved such high performance figures? The reason is that the performance of a given bond – especially under shorter investment horizons – is generally driven more by changing interest rates and credit risk premiums than by the coupon or yield to maturity. 

In this article, we attempt to estimate returns for Swiss bonds in 2025.

Buy-and-hold perspective

If buy-and-hold investors bought Swiss bonds at the beginning of 2025, they would receive a yield to maturity of less than 1% in most cases. What does this mean?

If a bond is bought at the date of issue and held until maturity, its performance is primarily determined by the coupon. The performance is therefore already known, at least approximately, at the time of purchase – assuming the bond does not default. 

For example, if you buy a 10-year bond with a coupon of 1% for a price of 100 today, the yield to maturity of this bond is approximately 1%. If you hold the bond until the maturity date, you will receive an average of 1% on your invested capital every year, regardless of whether the price rises to 110 or falls to 90 in the meantime. Buy-and-hold investors, by definition, do not want to realise any interim gains or losses.

If a buy-and-hold investor had only paid an initial price of 95 for the same bond, the yield to maturity would be around 1.5%. That is because the investor would realise a gain in value from 95 to 100 over the 10-year term in addition to the coupon. Accordingly, with an initial price of 105, the yield to maturity becomes about 0.5%, because the coupon income is reduced by the loss in value from 105 back to 100. 

Given that buy-and-hold investors are not interested in daily market fluctuations, they often value their bonds using the amortised cost method rather than the currently available market price. This valuation method assumes that the price of the bond moves evenly over time from the purchase price towards the redemption price of 100. The resulting volatility figures are therefore of little use as a risk indicator.

Market-oriented perspective

While the long-term performance of bonds is mainly determined by the coupon, the dynamics of interest rates and credit risk premiums are particularly relevant for performance over shorter investment horizons. They move in opposite directions to the bond price: falling interest rates and credit risk premiums lead to higher bond prices, while rising rates and premiums cause prices to fall. 

Our 10-year bond, for example, gains around 10% in the first year if interest rates fall by 1%. Added to this is the coupon income of 1%, which results in a total return of approximately +11%. Conversely, if interest rates rise by 1% in the first year, the value of this bond drops about 10%, which the coupon income of 1% can only compensate for slightly. The resulting annual total return, in this scenario, is approximately -9%. 

Return expectations for 2025

The strong performance of Swiss bonds in the last three years mainly resulted from comparatively large changes in interest rates and credit risk premiums, rather than coupon income.  We do not currently expect similarly high performance figures for 2025. The return expectations of course largely depend on the expected changes in interest rates and spreads. The tables below show expectations for Swiss bond returns in various market scenarios.

FIG 2. Return expectations for Swiss bonds in 2025²

Read also: What is the large Swiss rate cut signaling?

The bull steepening scenario – where short-term yields fall more quickly than long-term yields – assumes that short-term interest rates will tend towards 0%, as is currently expected by the market, and that long-term rates will remain at the level from the start of the year. In this scenario, return expectations for 2025 remain positive but significantly lower than in the two previous years. This is because the potential for even tighter credit risk premiums and significantly lower interest rates appears limited. 

The return figures in 2025 are therefore once again likely to be driven more by coupon income than by market fluctuations.

If the bull steepening scenario materialises, the SBI A-BBB Index will outperform the SBI AAA-BBB Index despite significantly less interest rate risk. Because the SBI A-BBB Index has more weight in the shorter maturities, it can benefit more from the fall in interest rates.

Overall, we expect that return figures for Swiss bonds in 2025 will probably be roughly in line with the long-term averages of around 2%.

FIG 3. Long-term average returns for Swiss bonds and Swiss equity³

The recent decline in rates has, of course, reduced the return expectations for Swiss bonds. However, the same is true for many other asset classes. This is because the expected return of an investment is ultimately nothing more than the sum of the expected risk premiums for the various risks of an investment. Because most investments include interest rate risk, lower rates also have a negative impact on their expected return.

Not a bad bet 

Measured against the risk of Swiss bonds as a whole, a 2% return is still a good compensation, especially considering the uncertainty in the current market environment. Swiss bonds should also help to stabilise any return fluctuations in an investment portfolio.

Given the continued solid fundamentals of Swiss corporate bonds and the supportive macro environment, we are convinced that this segment still exhibits a good risk/return profile. It generally benefits from a strong diversification of interest rate risk and credit risk. 

Thanks to the high quality of issuers and the low default risks of the Swiss bond market, it may also be worthwhile for buy-and-hold investors to skim off a slightly higher credit risk premium with Swiss corporate bonds in the long term.