The sometimes hefty interest rate rises implemented by central banks are not without consequences for the stock markets, as rising base rates are known to be a difficult environment for equities. This is best illustrated by the SMI and the EURO STOXX 50, which have slipped around 6% over the last three months. Since the turn of the year the percentage losses of these indices have actually hit double figures. It’s an ill wind that blows nobody any good, though: while share prices have trended southwards, the money markets are delighted with higher yields. The ten-year German government bond, for instance, has climbed from 0.82% in mid-July to 1.59% now. Across the sea, US ten-year treasuries are actually trading above the 3% mark. And positive returns are now possible even here in Switzerland, albeit on a much smaller scale. The interest rate on Swiss Confederation bonds with a ten-year term currently stands at 0.8%. For the shorter terms of three years, however, savers are having to make do with rather less, the yield here being only around 0.6%.
How long, though, will the upward cycle on interest rate markets last? It’s a legitimate question, because many investors are already concerned that the central banks could trigger a recession if they take too aggressive an approach. Even now, economic weakness is evident across a broad front. To give an example, the most recent eurozone purchase managers’ index (PMI) for the private sector, which encompasses both industry and services, fell 0.7 points to 49.2. The barometer thus dipped to an 18-month low, putting it well below the growth threshold of 50 points. In the view of many experts, this means that a downturn in the winter half-year appears ever more likely. Risks of recession or even stagflation could force the monetary watchdogs to rethink, given that they have a duty to keep the economy going rather than focusing on price stability alone. Just a few weeks ago, reports that inflation had passed its zenith – in July prices rose 8.5% after 9.1% in June – triggered speculation about interest rate cuts in the USA for 2023. These assumptions in turn promptly depressed market interest rates. Whereas the ten-year US bond stood at just under 3.5% in the middle of June, higher than at any point in the last eleven years, by the start of August it was trading at just around 2.5%. The level of interest rates in Switzerland also fell noticeably in parallel (see graph).
In view of the uncertain environment, then, investors are facing huge challenges. Share prices are fluctuating unpredictably up and down, the same is true on bond markets and cash is suffering real-terms depreciation due to high inflation. With a new step-up note, however, Leonteq is providing an opportunity for investment that meets the many challenges. This is a structured product with a stepped interest rate and a term of three years. What this means is that, in contrast to classic bonds, for instance, the guaranteed coupon payment changes over the investment period – and actually goes up: in the first year the interest rate is 1.0% p.a., the next year it rises to 1.5% p.a. and in the third year holders of the step-up note are even paid a coupon of 2.0% p.a. on the nominal. The product thus delivers a higher return than comparable government bonds right from the start.
The attractive interest rate is only one side of the step-up note, though: the product also offers full capital protection at the end of the term, which means that 100% of the nominal is repaid. That makes the Swiss franc-denominated money market certificate also suitable for conservative investors who want to avoid the current price turbulence while at the same time having the confidence of knowing that they will get their committed capital back again at the end. The repayment is not linked to an underlying, unlike the case with a barrier reverse convertible, for instance.
Capital Protection: 100%
Coupon Payments
Issuer: Leonteq Securities AG
We look forward to answering all of your questions about our products and how they are traded. Please don't hesitate to get in touch! Phone: 058 800 11 11, email info@leonteq.com or contact us here.