While the triumph of Donald Trump and the Republican camp gaining full legislative powers is celebrated on Wall Street, the bond market’s reaction is more measured. Coinciding with Donald Trump’s rebound in the polls, the correction endured in October foreshadowed the “red wave” that swept through last week. Although widely expected, this scenario had little impact on dollar yields. After a nervous episode during election night, the yield on the 10-year T-Note returned to the neighbourhood of 4.3%.

Beyond Donald Trump’s election promises and rhetoric, the new administration and the Republican majority will be judged on their actions and their consequences for growth, inflation and public finances. On the trade front, a protectionist shift could be implemented quickly and revive inflation. However, this effect is likely to be temporary, as import taxes are only partially passed on to final prices on a one-off basis. A tightening of migration policy and the deportation of “illegal” workers could also have an inflationary effect, but it is possible that Donald Trump will prove more pragmatic in office than in his campaign to win over the working classes.

When it comes to the budget, Donald Trump could face some resistance from Congress. Although the Republicans have a majority in both chambers, the GOP has many members who want to reduce the weight of the public sector. Some tax cuts may be rejected, and the Libertarian wing will seek to reduce public spending.

The risk of interference with the Federal Reserve also poses a threat to the bond market. However, the central bank’s U-turn in September and last Thursday’s 0.25% cut in the Fed funds rate are likely to ease tensions between Jerome Powell and Donald Trump. The pre-emptive easing of monetary conditions serves the new president’s interests, but this convergence could be undermined in the not-too-distant future if renewed inflationary pressures lead the FOMC to interrupt the rate-cutting cycle.

Donald Trump’s return to the White House entails serious risks for dollar-denominated bonds, but these risks are now being rewarded with decent real and nominal yields that are far from justifying an aggressive underweighting of bonds at a time when equities are peaking at all-time highs on the back of AI promises and a new era of “Trumponomics”.

On the euro capital market, yields are falling again. Far from the hopes raised by the “red wave” in the USA, the eurozone seems unfit to meet the geopolitical and economic challenges ahead in an unstable and fractured world. A few months after France, Germany too is experiencing a political crisis likely to hamper the reforms and fiscal stimulus measures needed to revive a weakened economy. In the UK, the Bank of England cut its key rate to 4.75% and reaffirmed its commitment to a gradual normalization of monetary conditions. In Switzerland, yields remain under pressure in anticipation of a further SNB rate cut in December, while annual inflation fell to 0.6% in October.

After a strong third quarter for bond markets, October was marked by a severe correction on the dollar capital market. For US Treasuries, the losses incurred since the start of the month are close to 2.5%, wiping out almost all the gains made in August and September. The correction intensified last week, pushing the yield on the 10-year US T-Note close to 4.25%.

The Fed’s ‘pivot’ on 18 September, with a 0.5% cut in money market rates, preceded a rise in yields of almost 0.6%! The slope of the dollar yield curve therefore steepened sharply. This shift was initially fuelled by cyclical developments, before being amplified by a reversal in the electoral outlook. The loss of momentum in the Kamala Harris campaign and Donald Trump’s return to the polls has clearly awakened the bond vigilantes, the market players who condemn fiscal laxity.

Pending the outcome of the election, bond investors have opted for caution and are refusing to ‘buy the dip’. This restraint is also justified by the strength of activity in the USA, confirmed by the latest business surveys (composite PMI up slightly to 54.3 in October), the fall in jobless claims and the firmness of orders for capital goods.

Following the elections, the FOMC will meet on 6 and 7 November. A 0.25% cut in the Fed funds rate to between 4.5% and 4.75% is almost certain, but the statement could call into question the ‘friendly’ roadmap unveiled in September. Celebrated by Wall Street, the somnolence of the hawks is not a welcome development for bond investors. Indeed, the rebound in dollar yields is partly attributable to an upward drift in inflation expectations, which might worsen if Donald Trump were to win the presidency. The Republican has admittedly stated that he will not replace Jerome Powell before the end of his term, but his return would entail risks of interference, or even a questioning of the Fed’s independence in the medium term.

On the euro-denominated bond market, yields were stable, at around 2.25% for the 10-year German Bund. Virtually unchanged at 49.7 in October, the composite PMI reflects a sluggish economy that is close to stagnation due to weakness in the manufacturing sector. The first estimate of third-quarter GDP growth due on Friday should reveal barely positive growth, driven mainly by France and Spain.

Against the tide, Swiss franc bonds are showing falling yields. With inflation falling back below 1% and the European environment gloomy, the SNB is likely to cut interest rates further. What’s more, the latest projections from the Federal Finance Administration point to a much smaller annual deficit than expected, at CHF 900 million instead of the CHF 2.6 billion budgeted. In contrast to the lax fiscal policies of the USA, France and Italy, Switzerland’s public finances are in good shape, underpinning the Swiss franc’s status as a safe haven.

Our vision of integrity

In our Code of Conduct, we have made two commitments relating to the corporate value ‘integrity’, namely:

• Working with our customers and partners in a spirit of partnership, loyalty and transparency.
• Proposing solutions with integrity and conviction, avoiding conflicts of interest.

At a time when the risk of greenwashing is coming under increasing scrutiny from supervisory authorities, particularly in the financial sector, there is no denying that integrity has become a cardinal value like fairness, trust and transparency.

Increasing regulatory requirements relating to sustainability issues are often perceived as constraints. Whether in the European Union with the CSRD (Corporate Sustainability Reporting Directive) and the CS3D (Corporate Sustainability Due Diligence Directive), or in Switzerland with the Code of Obligations (Art. 964 ss) and self-regulations on clients’ ESG preferences, it is now becoming difficult, if not impossible, to hide behind false pretences.

And what if, in the end, these regulations were a godsend, a safeguard promoting integrity while guaranteeing fair competition between companies required to publish comparable information?
Here’s how ONE swiss bank strives to remain honest in its approach to sustainability.

Integrity is one of the cornerstones of our sustainability strategy

Any organisation that wants to embark on a viable approach to sustainability has no choice but to do so with integrity. Why? Because beyond common sense, an organisation is part of an ecosystem and cannot be self-sufficient. Its various stakeholders (employees, customers, shareholders, suppliers, etc.) who are upstream, at the heart or downstream of its value chain, need to create a relationship of trust based on a clear ‘social contract’.

In a highly competitive and increasingly regulated world, organisations are becoming increasingly fearful, and some may tend to want to ‘do too much’, by deliberately or inadvertently providing incorrect information. For example, some companies include in their sustainability reports significant figures for avoided greenhouse gas emissions, but without providing any explanation of how they were calculated. When you consider how complicated the methodology is (see the Net Zero Initiative’s Pillar B guide developed by Carbone 4 – Net Zero Initiative – The pillar B guide), there is plenty to be puzzled about…

Integrity and prevention of greenwashing in the financial sector

On 19 June 2024, the Federal Council announced that it was opting for a self-regulatory approach to preventing greenwashing in the financial sector, referring to the self-regulations/guidelines published by the AMAS and the SBA on clients’ ESG preferences.

As a reminder, in May 2024, the SBA updated its guidelines, which came into force on 1 September 2024, in which it goes further than in the previous version of October 2023, namely:

• The addition of a definition of ‘sustainable’ investments (see detailed classification in Appendix 3 of the AMAS self-regulation).
• New requirements relating to the prevention of greenwashing (risk identification and training needs).
• Verification of compliance with its directives by the external auditor.

To simplify things, we often talk about ESG funds or investments, but the acronym ‘ESG’ refers to criteria. It is better to talk about responsible investments (exclusion, ESG integration, proxy voting, etc.) to avoid any confusion.

At ONE swiss bank, we never talk about sustainable investments because we apply two approaches in our funds: exclusion and ESG integration. In the interests of integrity and transparency, we published this year our Responsible Investment Charter on our website, so that our partners and the wider market know what solutions we are offering to date.

Words are important, and the term ‘sustainable’ unfortunately tends to be overused. So, we need to be careful, without resorting to ‘greenhushing’, which is just as damaging to a company’s reputation as ‘greenwashing’.

The string of indicators published last week in the US highlights a robust, even dynamic, expansion. The much-anticipated employment report showed a marked rebound in job creation in September, with 254,000 jobs created after 159,000 in August, a figure that was revised upwards. The unemployment rate derived from the household survey fell further to 4.1%. The jump to 4.3% that had alarmed the financial markets at the beginning of August is now seen as a temporary anomaly.

The sustained rise in average hourly earnings (0.4% month-on-month, 4.0% year-on-year), now well in excess of inflation, should have a favourable impact on consumer spending. Other statistics relating to the labour market corroborate the message conveyed by the employment report. The number of job vacancies rose sharply in August, and initial jobless claims remain at a low level. The ISM surveys show persistent sluggishness in the manufacturing sector, reflected by an unchanged PMI of 47.2 in September, and a significant strengthening in business activity in the services sector, where the PMI jumped from 51.5 in August to 54.9 in September.

The recent news validates the ‘gradual’ roadmap unveiled by central bankers at the last FOMC meeting and reaffirmed by Jerome Powell in his speech on 30 September. The path involving two further cuts of 0.25% between now and the end of the year remains realistic, but investors have been forced to revise down their expectations of a faster and more generous interest rate cut. As a result, the week ended with a sharp rebound across the entire interest rate term structure. The pain was particularly severe on short maturities, with the yield on 2-year Treasury bonds jumping by more than 40 basis points to break the 4% barrier, which was also exceeded by the yield on 10-year T-Notes.

The rebound in dollar yields was felt in Europe, with the notable exception of Switzerland, which was largely spared. After flirting with a level of 2%, the yield on the 10-year German Bund climbed back to around 2.25%, without the slightest regard for the fall in inflation seen in September. Down by 0.1% in September, the consumer price index for the eurozone showed an annual rise of 1.8%. Excluding energy and food, ‘underlying’ inflation was 0.1% over one month and 2.7% year-on-year. Although the eurozone is stagnating, an unemployment rate unchanged at 6.4% still reflects a tight labour market by historical standards. Despite this, the deterioration in the business climate and the fall in inflation justify a further cut in interest rates next week and then in December, taking the deposit rate to 3.0% by the end of the year.

The rebound in oil prices resulting from escalating tensions in the Middle East and the ambitious stimulus package announced in China have also undermined bonds. Despite this, the recent correction is creating new opportunities for investors overexposed to equities with complacent valuations or money market investments bound to become less profitable.

In line with the ‘leaks’ conveyed by Nick Timiraos of the Wall Street Journal, the Federal Reserve has begun the cycle of interest rate cuts by reducing the Fed funds rate by half a percentage point to a range of between 4.75% and 5.0%. This choice is debatable, but not unreasonable in view of the probable fall in inflation, from 7% to 2.2%, observed since the summer of 2022 and the upturn in the unemployment rate, from 3.4% in April 2023 to 4.2% last month.

The decision was taken by a majority of 11 to 1, with Michelle Bowman in favour of a 0.25% cut. The projections unveiled last Wednesday and Jerome Powell’s remarks at the press conference suggest that the 0.5% cut should not be seen as an increment that will automatically apply at future meetings. The median of the forecasts unveiled last Wednesday now implies only two cuts of 0.25%, taking the Fed funds rate to between 4.25% and 4.5% at the end of the year, followed by a cumulative cut of 1% in 2025. These projections imply a more cautious path than is still expected by investors and traders. In short, the Federal Reserve has started its cycle with a strong move, but it is keeping a close eye on inflation and does not rule out interrupting its action if necessary.

In addition to the interest rate forecasts, the other projections reflect the hope and desire to achieve a ‘soft landing’, with real growth and inflation close to 2% in both 2024 and 2025, and unemployment peaking at 4.4% before falling back to 4.2%, which the FOMC now sees as a long-term equilibrium level.

The Fed’s generous rate cut does not sit well with recent indicators, which are generally positive. Although modest, the 0.1% rise in retail sales in August was good news after the 1.1% surge the previous month. The rebound in manufacturing output, which rose by 0.9% in August after falling by 0.7% in July, and the fall in initial jobless claims are symptoms that suggest that the US economy is continuing to expand at a robust pace that is hardly compatible with a rapid, large-scale cut in interest rates. This observation has not been overlooked by bond market participants, as evidenced by the fact that the yield on the US T-Note has risen by around ten basis points to around 3.75%.

In Europe, the Bank of England played it safe by keeping its key rate at 5%. The favourable trend in the UK economy, reflected in sustained growth in retail sales and positive signals from business surveys, validates the central bank’s gradual approach. These developments led to a slight increase in sterling yields, in line with dollar-denominated bonds.

On the euro capital market, yields are steady. The deterioration in the business climate highlighted by the latest surveys raises fears of a recession, which is already affecting the manufacturing sector. The decline in the services PMI from 52.9 in August to 50.6 in September could herald a recession and prompt the ECB to ease policy further on 17 October and 12 December. In Switzerland, the SNB is also set to cut its key interest rate to 1% on Thursday, while leaving open the possibility of a further reduction, in line with the Fed and the ECB.

Our vision of determination

In our Code of Conduct, we have made two commitments relating to the corporate value ‘determination’, namely:

• To be determined in our actions and in producing sustainable results.
• To constantly strive to develop our activities and those of our partners, as well as our customers’ assets.

It is often instructive to go back to the etymology of words to fully understand their origin and meaning. The word ‘determination’ comes from the Latin ‘determinatio’, meaning ‘to set a limit, end, extremity’. The current version of the Académie française dictionary offers several definitions:

• To delimit precisely, to characterise clearly, without ambiguity.
• A decision taken after having hesitated between several parties.
• Firmness and constancy in carrying out what has been decided upon.
• The fact of being the cause or condition of the existence of a phenomenon.

On reading these definitions and in the light of the bank’s commitments, we will see that the characteristics of determination are fully correlated with the implementation of our sustainability approach.

Making a long-term commitment and staying the course

When we talk about sustainability, we often highlight the evolution of the economic theories introduced successively by Milton Friedman and R. Edward Freeman.

In the 1970s, M. Friedman considered that the purpose of a company was to maximise its profit (its financial value) to serve the interests of its shareholders.

In the following decade, R. E. Freeman introduced the stakeholder theory, based on the quest to maximise integrated value, i.e. not only the financial value but also the social and environmental value. In doing so, he emphasised the importance of business ethics, an essential element of a sustainability approach, especially in the banking sector where governance issues are particularly sensitive.

Why talking about these theories? Because one of the key factors in the success of a sustainability approach is to define a long-term strategy, the fruit of a strong conviction of top management and of a regular dialogue with all stakeholders.

At ONE, from 2021 onwards, we began to define clear and realistic ambitions. We have never tried to ‘sell the dream’, regardless of the new measures to prevent greenwashing in the financial sector. For us, determination means conviction, and this must be reflected in our actions. For example, our action plan published in our first Sustainability Report in October 2022 has been included in the 2023 edition to communicate transparently on our progress. Being determined also means accepting to move forward step by step without ever losing sight of our objectives, even in the most turbulent times.

Determination in the service of constructive dialogue with our partners

As part of the B Corp certification process, the bank has already been able to identify areas for improvement, particularly in terms of environmental impact. For several weeks now, we have been talking to some of our suppliers about reviewing our purchasing policy and introducing more sustainable solutions, such as using recycled paper and environmentally friendly cleaning products in our premises. We have also sent for signature our Suppliers Charter, which includes commitments on human rights and the environment. These various initiatives have been very positively received and demonstrate that ONE and its suppliers are partners driven by the desire to develop responsible purchasing practices.

As far as our customers are concerned, there is no denying that the bank operates in a highly competitive environment. Like our suppliers, we see them as partners. We are solution-oriented and committed to serving their interests. Since 1 January 2024 and the entry into force of Swiss Banking Association’s self-regulation, we have been requested to ask our new clients about their ESG (Environmental, Social and Governance) preferences. Existing clients will also be affected from 1 January 2025. This ‘obligation’ is an opportunity to get a better idea of our clients’ appetite for different responsible investment approaches. To date, the bank applies two approaches (exclusion and ESG integration), both of which are publicly communicated in our Responsible Investment Charter. However, convinced of our need to progress, we will be launching an impact fund in the coming weeks. This reflects our desire to develop our investment offering to meet new market expectations and to contribute to Switzerland’s influence in the field of sustainable finance.

Two and a half years after the start of a cycle that lifted money market rates from 0% to 5.5%, the Federal Reserve is preparing to ease monetary policy. The numerous signals sent out over the summer leave no room for doubt. The FOMC will cut the Fed funds rate on Wednesday. A week ago, most observers were expecting a measured move, involving a 0.25% rate cut, but expectations are now leaning in favour of a 0.5% cut, taking the key rate to between 4.75% and 5%.

This last-minute change is largely attributable to an article by Nick Timiraos of the Wall Street Journal, which discusses the dilemma facing the FOMC: should it start with a small cut or a big one? Rightly or wrongly, Nick Timiraos is seen as an informal conduit of information used by the Fed to shape expectations. In other words, this journalist seems to have privileged access to central bankers. If this is the case, then his article is not trivial, but is designed to prepare Wall Street for a 0.50% cut. In the past, leaks orchestrated by the Fed were echoed by Greg Ip, who has also just written a plea for an initial 0.50% cut. That was all it took to turn expectations in that direction, causing dollar yields to ease and renewed appetite for risky assets, which wiped out the losses suffered last week.

Ironically, recent reports have highlighted persistent inflationary pressures. Excluding energy and food, both consumer and producer prices posted monthly changes of 0.3% in August. Year-on-year, ‘core’ inflation remains at 3.2%, a long way from the 2% target (which has, however, been achieved over the last five months). The rebuilding of consumer confidence and the reduced level of initial jobless claims do not justify precipitous action by the Fed.

Beyond the outcome of Wednesday’s meeting, the trajectory of interest rates is more important than the size of the first cut. Consequently, investors will be paying close attention to the forecasts to be unveiled on Wednesday. The 1.25% cut expected today looks very generous and implies a tangible risk of disappointment and hence of a bond market correction. On the other hand, projections that confirm expectations should have little impact on short-term yields, but could imply a steeper slope and greater pressure on long-term yields.

In Europe, the ECB delivered the 0.25% rate cut that was widely expected. The statement and press conference did not include any specific signals, but reaffirmed the authorities’ desire to adjust monetary policy, meeting after meeting, on the basis of a wide range of data. An interest rate cut in October is therefore neither a foregone conclusion, nor can it be ruled out. In short, the ECB still favours a gradual adjustment that should lead to more or less neutral conditions during 2025. After the Fed and the ECB, the Bank of England will hold a meeting on Thursday. A majority of economists believe that the central bank will take a pause after cutting its key rate on August 1st. However, the prospect of faster interest rate cuts in the US has had an impact on the sterling yield curve and, to a lesser extent, on the Swiss franc capital market. To conclude the series of central bank meetings, the SNB is expected to cut its key interest rate from 1.25% to 1% on September 26th.

While the equity market has fully recovered from the stress of the first few days of August, US Treasuries have surrendered only part of the gains made over the summer. The yield on the 10-year T-Note has risen above 3.9%, but is still a long way from the 4.2% to 4.4% trading range seen at the start of the summer. Despite the recent correction, US Treasuries returned close to 2% in August. Riskier segments performed well as credit spreads fell back.

The mild tensions seen over the past week are attributable to indicators that suggest that the US economy is continuing to expand robustly, neither too hot nor too cold, in line with Goldilocks’ preferences. Real GDP growth for the second quarter has been revised upwards from 2.8% to 3.0%. The sustained rise in personal spending in July (0.5% in nominal terms and 0.3% in real terms) does not reflect any worrying break, but the fall in the savings rate seen in recent months probably heralds a moderation in household demand.

Price indices attached to personal consumption expenditure, up by 0.2% month-on month and 2.5% year-on-year in July (respectively 0.2% and 2.6% excluding energy and food), show variations compatible with the imminent policy pivot announced by Jerome Powell at the Jackson Hole symposium. However, the extent and pace of the cycle due to begin on September 18th remain uncertain and will depend on future economic and financial developments.

The employment report due on Friday is of particular importance. Figures confirming the weakness highlighted by the report published on August 2 could prompt the Fed to cut its key interest rate by 0.5% on September 18. On the other hand, a fall in the rate of unemployment and a rebound in hiring should prompt the Fed to act with restraint, in line with the scenario currently favoured by a majority of investors. In anticipation of the report, the fact that initial jobless claims have remained stable at around 230,000 for several weeks and the improvement in consumer confidence are grounds for optimism, in line with the consensus forecast of a fall in the jobless rate from 4.3% to 4.2%. The ISM diffusion indices are also likely to have some impact, particularly if they signal a concomitant contraction in manufacturing activity and that of service providers.

In Europe, yields also picked up. This correction wiped out the entire fall that began in early August, for the German Bund, the British Gilts and Swiss government bonds. The marked fall in inflation in the eurozone, from 2.6% in July to 2.2% in August, should not overshadow the persistent pressure on service prices, which rose by 0.4% over one month and by 4.2% year-on-year. Although these figures do not call into question the 0.25% cut in the ECB’s key rates expected next week, they do argue for a dose of restraint in a context of reduced unemployment, which is fostering the development of the ‘price-wage’ loop.