Monthly Report 07/2025

The US government bond market is, in a sense, the center of all financial markets. Even Donald Trump had to abandon his aggressive tariff war when the government bond market began to tremble. Some feared that countries such as China would take retaliatory measures in the trade dispute with the US, such as quickly selling off their holdings of US government bonds.

This would have caused massive disruption, which is not welcome in this key market. The responsible US Treasury Secretary Scott Bessent is well aware of this, which is why he ultimately announced a 90-day pause, thereby restoring stability to the government bond market. Even this market is not as liquid as people always believe.

The benchmark ten-year US Treasury bond yielded 4.2% at the end of June, reflecting investors’ inflation fears. The comparable government bond from Germany yields 2.6% and that of Switzerland 0.4%. The higher yield in dollars sounds tempting at first glance, but a further currency downturn must be expected. Hedging the dollar currently costs 4.4% per annum – costs that cannot be deducted from interest income subject to income tax.

Countries that have their budgets reasonably under control are currently valued on the capital market. Following important reforms in Italy and Greece, their bonds are yielding only 3.4% and 3.3% respectively at the beginning of July – a relatively low, almost record-low premium over German bonds. In the US, where the budget situation is also likely to deteriorate significantly as a result of the new “One Big, Beautiful Bill”, demand for long-term bonds is waning despite attractive yields (4.8% for 20- and 30-year bonds). The federal government in Washington alone has already accumulated USD 36 trillion in debt and will have to issue USD 9 trillion in new government bonds over the next 12 months.

The US economy is experiencing significant economic inconsistencies, primarily due to its ultra-expansionary fiscal policy, which is contributing to an annual increase of approximately 7% of GDP in debt, and its ultra-restrictive monetary policy. There is certainly considerable scope for interest rate cuts in the US, especially as goods price inflation has been hovering around 0.0% for months and service price inflation is declining. High key interest rates are having a counterproductive effect on the economy. The conflict between Donald Trump and Fed Chairman Jerome Powell is coming to a head.

If the Fed, which is under heavy pressure from the president, is persuaded to cut key interest rates too soon, yields at the shorter end of the yield curve are likely to fall, as is the dollar. Purchasing power parity is around 0.75, which is where the exchange rate is likely to end up.

A steepening of the yield curve is a healthy sign of a “normalized” capital market. Short-term investments should yield lower returns than those made available to the economy over the long term.

From the perspective of the Swiss mortgage market, the first half of the year saw a parallel development to the yield curve, with SARON-based short-term mortgage loans becoming cheaper and longer-term fixed-rate mortgages becoming more expensive. This underpins a structurally sound, sustained divergence between short-term and long-term interest rate expectations. However, since the beginning of the year, the lack of bank deposits, more expensive refinancing via covered bonds, and stricter capital requirements have made the Swiss mortgage market more expensive in general.

What is special about the Swiss franc interest rate market is that short-term yields have already drifted back into negative territory and remained there. The yield curve is negative in the 3-month to 3-year loan segment. At the beginning of the year, the entire yield curve was still above zero.

In general, bond markets steepened in the first half of 2025. This was evident in both the euro swap curve and US Treasuries. The rise in longer maturities is also a sign of increasing risk aversion toward holding long-term bonds.

Towards the end of June, tensions in the Middle East eased further and progress was made in trade negotiations in other regions. Risk appetite increased, some stock indices reached new all-time highs, credit spreads narrowed, and credit risk premiums (CDS spreads) approached the lower end of their usual ranges. This also contributed to a noticeable recovery in issuance volumes, particularly in segments with higher beta such as high-yield bonds and hybrid (euro) corporate bonds.

Sectors that performed well in the first half of the year included European banks, with AT1 bonds performing particularly well. The real estate sector, on the other hand, continues to lag behind, especially in Europe. We maintain our positive view on bank bonds and remain cautious on the European real estate sector. The risk-friendly environment is supporting the ongoing recovery in auto and energy-related bonds.

The Credit Opportunities Fund (COF), which focuses on credit risk premiums and can best be classified as a high-yield bond fund, lost slightly less (-1.0%) between the start of the year and April 8 than US high-yield bonds (-1.8%). It also recovered quickly. As of mid-year, the performance since the beginning of the year stands at +1.9%. This corresponds to an annualized return of +3.8% for the year as a whole.

Around one-third of the COF’s volume of just under CHF 500 million is invested in high-grade bonds, making it somewhat more defensive than its peer group.

In financial terms, this means that the COF has significantly lower volatility than its peer group. Many conclude from this that the return is also likely to be significantly lower. However, this is not necessarily the case, as the COF proves. The stability of the COF in the current crisis compared to previous crises is certainly characteristic of its somewhat more defensive positioning.

However, there have also been significant improvements in the corporate landscape, whether in the establishment of crisis resilience or in general training and continuing education in the areas of financial management, treasury, and controlling. In Europe, corporate balance sheets in the high-yield segment have never been as healthy as they are today. The resilience of European companies is higher than ever before.

We therefore remain committed to significantly outperforming the Swiss Bond Index, which consists primarily of government bonds, mortgage bonds and similar “safe” securities, over a longer period with corporate bonds.

Since its launch more than 13 years ago, the COF has achieved an annual return of 2.5% in Swiss francs, net of all costs and fees. This means that an initial investment of 100 Swiss francs has grown to an impressive 136.85 Swiss francs thanks to compound interest.

Had the Swiss Bond Index been used as a benchmark instead, the return would have been just 110.24 Swiss francs (just under 0.8% per annum). The costs of the corresponding ETF solution (approx. 0.2% p.a. total expense ratio) would then have to be deducted from this.

With the Zugerberg Income Fund (ZIF; +1.3% since the beginning of the year; +2.6% annualized total return), we are clearly in positive territory after the first half of 2025. The ZIF’s basic orientation is more defensive than that of the COF, and this is reflected in both its returns and its return expectations. It has become extremely challenging in the capital market to achieve a positive total return with bonds of the highest credit ratings.

Infrastructure is and remains the backbone of society, providing important and valuable services for economic stability and growth. The shift toward increased production and distribution of electricity from renewable energy sources is driving a wave of investment in power grids and energy solutions.

Although we do not expect a second wave of inflation, the natural hedge against inflation offered by infrastructure stocks is an important argument in favor of such purchases: thanks to the regulatory environment, long-term contracts, and/or monopolistic pricing power, infrastructure stocks serve as a hedge against inflation.

Added to this is the advantage that they are a relatively defensive component of a diversified overall portfolio: limited overlaps, lower volatility than growth stocks, favorable downside risk control, and potentially robust risk-adjusted returns compared to global equities are the main arguments in this regard.

Nevertheless, potentially higher returns can be achieved than with a broadly diversified basket of stocks: reliable dividends and consistently higher yields compared to global stocks, as well as defensive bond characteristics during general stock market downturns, are important attributes of infrastructure stocks.

Take the energy infrastructure provider Engie, for example. Its price-to-earnings ratio for the year after next (2027: 9x) is around 30% below the industry average. In addition, the infrastructure stock offers a sustainable dividend yield of around 7%. We anticipate that this global energy group will achieve substantial earnings improvements in the coming years and will reduce its risk through two key measures.

First, asset restructuring and cost reductions will make the business more dependent on regulated activities (around 65% by fiscal year 2027) and ensure that it remains linked to a strong earnings model. Since 2016, Engie has increasingly focused on networks and services while reducing its exposure to the free market.

Second, the group is creating a stronger platform for further business growth. We believe that the refocus on renewable energies, electricity grids, and energy solutions will concentrate the portfolio on areas where the energy transition to net-zero emissions (through solar, wind, geothermal, biomass, hydropower, etc.) will bring significant investment and growth opportunities as well as value creation potential.

The broad US stock index S&P 500 reached a new record high in terms of market capitalization at the end of June. It stood at USD 55,600 billion (June 30), surpassing the previous record high of February 19, 2025, by 1.0%. For those who do not use the dollar as their reference currency, however, there is still a significant difference between these two figures: calculated in Swiss francs, the S&P 500 was down 11.4% (excluding dividends) and 10.9% (including dividends) at the end of June, significantly lower than in mid-February. The exchange rate is currently having a massive impact on USD prices.

Nevertheless, the S&P 500 Index remains the benchmark for all companies. Amrize, Holcim’s US business, which has been traded separately from the “rest of Holcim” since June 23, is also aiming to be included in this index. Jan Jenisch, from Zug, is CEO of the growth company, which has doubled its sales in the past five years and developed into the most successful equity story in the American construction industry. Amrize is currently number one in cement, number two in commercial roofing, and number five in roofing systems for residential buildings.

In view of the aging real estate stock, the renovation sector is currently booming, as is the construction of data centers, which is being driven by the AI wave. Nestlé shares had a miserable June (-10%), which also explains the relatively weak performance of the SMI (-2.5%).

The SMI was by far the weakest stock market in June. Asian and North American indices performed particularly well. Even taking into account the weakness of the dollar, the S&P 500 (+1.8% in Swiss francs) and the Nasdaq technology index (+3.3%) posted gains.

Cash flow in the second half of the year is difficult to assess. Typically, the first few weeks see rebalancing transactions in portfolios, i.e., markets and stocks that have risen sharply tend to be downgraded, while markets and stocks that have lagged behind are bought up. From this perspective, it would come as little surprise if, for example, the German stock market, with its benchmark index DAX, were to experience a slump after its strong overall return in the first half of the year (+20.1%).

Conversely, many US investors have little international exposure. More and more analysts are advising them to invest in Europe. This could have a huge impact. Some see great potential in the European defense industry, which would generally serve to improve industrial manufacturing capacity. Of course, with a Russian president like Vladimir Putin, peace policy and peacekeeping mean something different than they did in the days of Gorbachev.

Some analysts interpreted the ever-higher gold prices of recent years as primarily reflecting investor fears. However, the price of gold rose to new record highs in the wake of massive purchases by the Chinese central bank. The peak was reached on June 13, 2025, at $3,432 per ounce. By the end of the month, the price had fallen by almost $200, finally ending at $3,269 (still up 24.8% since the beginning of the year) and resulting in the first negative monthly return of the year in June.

In Swiss francs, the rise in the gold price was less spectacular (+10.3% since the beginning of the year), a price level that has been trending sideways since mid-February 2025. However, it is still around 50% higher than the average gold price in the years 2020 to 2023.

The Chinese central bank has accumulated large foreign exchange reserves thanks to its large trade and current account surpluses with the US. However, it appears that a significant amount of these dollars have been exchanged for gold. Progress on the trade agreement with the US has also led to a decline in the price of gold.

It is likely that China will be pressured to hold more US government bonds again, which would weigh on the price of gold. Conversely, various geopolitical tensions are likely to support demand for “safe havens” for asset preservation. In addition, Asian countries with high current account surpluses have generally increased their international currency reserves significantly. The purchase of gold alongside the dollar was a diversification measure. Culturally, these countries are closer to gold than to the euro, for example.

Gold has become the second most important reserve currency of all central banks after the dollar and ahead of the euro. Together, they held 36,197 tons of gold at the end of 2024. And an unusually large number want to build up their positions to better protect themselves against a collapse of the dollar, according to the World Gold Council.

It is certainly interesting to note that American households that had once snapped up gold bars and coins and stashed them at home or in safes sold off their precious metal holdings in the first half of 2025. Like US stock traders, they feel more comfortable with Donald Trump’s tariffs, rising government debt and geopolitical tensions.

That is why, after the breathtaking rally in the gold price over the past two years, they are probably ready to cash in their gains. Many small investors tend to be Republican anyway. From their point of view, there is therefore less reason to buy or hold gold as an “angst currency”.