Burst and disappeared

Until just a few months ago, the ever-increasing expansion of balance sheets at the world’s most important central banks – the U.S. Federal Reserve (Fed), the European Central Bank (ECB), the Bank of Japan (BoJ) and the Bank of England (BoE) – was still the order of the day. Likewise, quantitative easing had virtually become the norm. At the same time, other central banks such as the Swiss National Bank (SNB) or the Scandinavian central banks had also expanded their balance sheets enormously since the Great Financial Crisis. The Fed had the largest balance sheet at almost USD 9 trillion, but the BoJ and the SNB were clear frontrunners as well, each with a ratio of central bank balance sheet size to gross domestic product (GDP) of over 100%. The ECB, along with the Japanese and Swiss central banks, did not raise key interest rates in the ten years before 2022. This led to a misallocation of capital in many areas, as the yield curves were massively depressed and in many places even moved into negative territory. In Switzerland, the yield curve was even completely negative for a time.

The "negative bubble" on the bond market has burst

For a long time, the monetary policy of Western central banks has led to massive misallocations, such as global bonds with a negative yield to maturity. As chart 1 illustrates very well, 24 months ago there were USD 18 trillion worth of bonds with a negative nominal yield.

This bubble has burst in recent months and even reached zero at the beginning of the new year. The bubble has thus literally disappeared. In the end, it was the ECB, with its announcement of its intention to reduce its balance sheet, and the BoJ, which has effectively started to loosen its yield curve control, that were responsible for the move to "zero". In our view, central banks have realized that an environment of negative interest rates will not bring the desired success in the medium to long term. However, central bank balance sheets will probably never again reach levels similar to those before the Great Financial Crisis. Quantitative easing is likely to be used in future crises as well.

The comeback of yields

As a result of the adjustment in the bond market described above, full yield curves have moved up a fair bit. They have risen more in the U.S. than in the euro area, but the rise in Europe has also created attractive opportunities here. The ECB and the BoJ have recently tightened their policies even further and the large central banks will remain restrictive in the coming months. In this environment, we maintain our preference for bonds over equities and see potential in short-term corporate bonds.