Capital has a price again
The capital needs of governments and businesses are likely to increase structurally in the coming years. Many industrialised countries are facing high levels of debt and substantial deficits, driven by demographic trends, defence spending, infrastructure and subsidy programmes, as well as the refinancing of existing debt at higher interest rates. In addition, companies are increasingly in need of capital, including for the expansion of artificial intelligence (AI) infrastructure and the reorganisation of global supply chains.
At the same time, it is precisely those investors who were previously less price-sensitive that are now pulling back. Central banks are now buying significantly fewer securities than they did in the years following the financial crisis and throughout the pandemic. Furthermore, China’s demand for US government bonds has fallen significantly, and greater fragmentation of world trade could exacerbate this trend. Added to this is a low household savings rate in the US, as well as technology firms that reinvest their profits and are increasingly acting as borrowers rather than lenders.
This makes capital more expensive, and interest rates are likely to remain elevated in the longer term. The yield on 30-year US government bonds has reached its highest level in more than 20 years. In Switzerland, by contrast, interest rates are likely to remain comparatively low, supported by high levels of savings, solid public finances, low inflation and the Swiss franc’s role as a safe haven. In the equity market, higher cost of capital is weighing particularly heavily on highly indebted companies, whilst profitability and balance sheet quality are becoming more important. In the bond market, current yield is regaining importance, whilst interest rate risk persists for long maturities. Swiss real estate is supported by the low interest rate environment, but valuations are elevated in parts. For gold, higher real interest rates act as a headwind, while fiscal and geopolitical risks provide support. A higher interest rate environment is therefore not necessarily negative, but it does bring selectivity, quality and broad diversification to the fore.
Allocation: asset classes unchanged despite rising cost of capital
The macroeconomic environment remains resilient, even if momentum is slowing. In the US, a robust labour market, solid consumer spending and strong investment activity are underpinning the economy, meaning a recession is not expected for the time being. Weaker survey data, however, point to slower growth. Europe, meanwhile, remains the weakest of the major economic regions. Higher energy prices have recently increased inflationary pressure, even though goods inflation is normalising. Both the Fed, under Kevin Warsh, and the ECB have therefore become more cautious, and the market has scaled back its expectations of further interest rate cuts. In Switzerland, by contrast, inflation re mains low at 0.8%. While the growing global money supply is supporting the economy and corporate profits, high budget deficits and a large supply of bonds continue to exert upward pressure on long-term interest rates.
Against this backdrop, we are maintaining a neutral position in equities. Solid corporate earnings and favourable liquidity conditions are supporting the equity markets, while high valuations and higher real interest rates argue against an overweight position.
Bonds remain underweight as we favour equities. Upward pressure on long-term interest rates persists, and duration risk remains elevated. Furthermore, in our view, the tight credit spreads offer insufficient compensation for the macroeconomic and geopolitical risks. We are maintaining our overweight positions in gold and Swiss real estate. Gold remains an important portfolio diversifier, with its structural case intact, even though higher real interest rates represent a headwind in the short term. While Swiss real estate is sensitive to rising discount rates, it continues to offer a more attractive risk-return profile than CHF bonds.
The fundamental focus of our investment strategy therefore remains unchanged: we prioritise quality, broad diversification and real assets.
Demand for capital is rising
For many years, capital was readily available and, consequently, inexpensive. Low financing costs became the norm for governments, companies and investors. From a historical perspective, however, this phase was exceptional. In the meantime, the balance between the supply of and demand for capital has shifted, and with it, the interest rate environment.
The growing demand for capital is particularly evident in public finances. Many industrialised countries are already heavily indebted and running significant deficits; this is especially pronounced in the United States. According to the International Monetary Fund (IMF), US public debt stood at around 126% of GDP in 2025. At the same time, the budget deficit, as reported by the Congressional Budget Office (CBO), amounted to approximately 5.8% of GDP in 2025. Key drivers include demographically driven spending on pensions and healthcare, rising defence and infrastructure spending and government subsidy programmes for strategic industries. This spending reduces governments’ financial flexibility and makes it more difficult to reduce existing deficits. As a result, governments must raise a larger portion of their funds on the capital market.
The existing debt stock and the associated interest payments amplify this effect. A large portion of the outstanding bonds was issued on favourable terms during the low interest rate period. As these debts approach maturity, they are gradually refinanced at the current higher market interest rates. According to the US Department of the Treasury, US Treasury bonds totalling more than USD 10 trillion will mature between 2026 and 2030. As a result of this refinancing, governments’ interest expenses may rise gradually. Higher interest expenses, in turn, can widen budget deficits and thus create additional financing needs.
However, the increase in financing needs is not limited to governments but also affects companies. A key driver here is infrastructure expansion related to artificial intelligence. According to MSCI, leading cloud and technology companies are expected to invest a combined total of approximately USD 800 billion in 2026. The focus is on new data centres, which have high demand for semiconductors, networking equipment, cooling systems and power supplies. Since this also requires the expansion of power grids, energy generation and production capacity, the additional capital requirements go far beyond the technology sector.
At the same time, the restructuring of global supply chains is increasing the need for investment. Companies are diversifying their suppliers and, as part of reshoring and nearshoring, relocating parts of their production closer to their home markets. While supply chains were optimised for many years to minimise inventory, maximise capacity utilisation and minimise costs, supply security and strategic autonomy are now becoming more important. These more robust structures re quire additional inventory and production capacity, making the economy as a whole more capital-intensive.
As a result of these developments, the capital requirements of governments and companies are likely to rise not just temporarily, but structurally. Higher deficits, extensive investments and increasing refinancing needs mean that more capital is required.
The supply of capital is growing more slowly
Rising demand is set against the available supply of capital. Household savings are a key source of this supply. Income not spent on consumption can be channelled through banks and financial markets to finance businesses and governments. According to data from the Bureau of Economic Ana lysis (BEA), the household savings rate in the US amounted to 4.1% of disposable income in July 2026, well below the average of about 6% from 2010 to 2019. As a result, private households are currently contributing less to the supply of capital than they did in the past.
The role of companies as capital providers is also changing. Retained earnings can either be invested in the financial markets or used for the companies’ own investments. Among large technology companies in particular, a significant portion of these profits is currently being invested directly in the expansion of AI infrastructure. These funds are therefore not available as capital on the financial markets. At the same time, the internal cash flow of some leading technology companies is no longer sufficient to fully finance their extensive investment programmes. For example, in October 2025, Meta raised USD 30 billion through a bond issuance, one of the largest corporate bond offerings in history. The major technology companies, which have long held large li quidity reserves, are thus increasingly operating not only as lenders but also as borrowers.
In addition to domestic sources of capital, cross-border capital flows have also shifted significantly. For many years, China was one of the most important foreign holders of US Treasury bonds. However, this demand has declined significantly. According to official data from the US Department of the Treasury, Chinese holdings peaked in November 2013 at approximately USD 1.32 trillion. By the end of June 2026, these holdings had fallen to approximately USD 633 billion. A larger portion of Chinese savings is now invested domestically or flows into other regions and investment vehicles. As a result, less Chinese capital is available to the US capital market. Tariffs and other trade barriers could exacerbate this trend. Although tariffs initially affect trade in goods, the US current account deficit is financed by capital inflows from abroad. If other countries export less to the US, they also earn fewer dollars that they can reinvest in US assets. Greater fragmentation of world trade could thus also affect the global supply of capital in the long term.
In parallel, the role of central banks has changed fundamentally. In the years following the financial crisis and during the Covid-19 pandemic, they purchased government bonds and other securities on a large scale. The balance sheets of the major central banks grew from around USD 10 trillion in 2010 to more than USD 33 trillion at their peak in 2022. Since then, they have fallen to around USD 26 trillion. With the reduction of their balance sheets, central bank demand for securities has declined, meaning that a larger portion of financing needs must be met by other capital market participants.
In other words, it is precisely those buyers who were previously less price-sensitive who are now pulling back. Central banks purchased government bonds for monetary policy reasons, while China did so to invest its foreign exchange reserves. They are being replaced by private investors who demand an appropriate return for holding government bonds. Since households are saving less and technology companies are investing their own funds, the supply of capital is likely to grow more slowly than demand.
What the new capital regime means for investors
When rising demand for capital meets a slower-growing supply of capital, competition for capital intensifies. Governments and companies then compete more fiercely for the available financial resources. As a result, investors can demand higher returns, causing nominal interest rates to rise.
This mechanism is particularly evident in long-term government bonds. A higher supply of government bonds, with demand remaining constant, leads to a rise in yields. For instance, the yield on 30-year US Treasury bonds stood at around 5.5% recently, its highest level in more than 20 years. Since Treasury bond yields serve as a benchmark for numerous other forms of financing, higher yields are passed on to the cost of capital throughout the economy.
The structural shifts in supply and demand suggest that inte rest rates may remain elevated over the longer term and that the cost of capital is likely to regain importance.
Through international capital markets, higher interest rates abroad also affect Switzerland. Nevertheless, interest rates in Switzerland are likely to remain lower than in many other industrialised countries, in part because Switzerland has high aggregate savings. According to IMF data, gross savings in 2025 stood at around 36.6% of GDP, significantly higher than the 24.4% in the euro area and the 16.8% in the US. At the same time, the government’s borrowing needs remain comparatively low. According to the IMF, public debt in 2025 amounted to only 39% of GDP, compared with around 87% in the euro area and 126% in the US. This combination of high savings and comparatively low government financing needs tends to keep interest rates down. Low inflation rein forces this effect. According to the Federal Statistical Office, inflation in Switzerland stood at 0.8% in August 2026. In the euro area, inflation was 3.3% according to a Eurostat estimate, and in the US, it was 3.4% according to the US Bureau of Labor Statistics. The low interest rate level is further supported by the Swiss franc’s special role as a safe haven, which underpins demand for franc-denominated invest ments. These factors suggest that interest rates in Switzerland are likely to remain comparatively low even in a global environment of higher interest rates.
As the cost of capital rises, the relative attractiveness of various asset classes also changes. The key factor here is the extent to which valuations and financing costs are affected by higher interest rates.
Equities are also affected by the higher cost of capital. The return demanded by investors rises, while higher discount rates put particular pressure on companies whose expected cash flows lie far in the future. In addition, financing becomes more expensive, especially for highly indebted companies. Profitability, balance sheet quality and the efficient use of capital therefore become increasingly important.
In this environment, the current income from bonds is re gaining importance. At the same time, interest rate risk per sists: if long-term yields continue to rise, bonds with long maturities in particular may lose value. Accordingly, we re main cautiously positioned with regard to the overall weight ing of bonds.
Switzerland’s comparatively low interest rates create more favourable conditions for real estate investments. Combined with a housing shortage and robust demand, this supports rental income. However, many listed real estate funds are already highly valued, which somewhat limits their further upside potential.
For gold, real interest rates are the key factor. Higher real interest rates represent a headwind, as they increase the op portunity cost of a non-interest-bearing investment. On the other hand, high government debt, fiscal uncertainty and geopolitical risks can support demand for gold as a store of value.
After years of particularly favourable financing conditions, the cost of capital is regaining importance. An environment with structurally higher interest rates is not necessarily negative for investors, but it does require greater selectivity, a focus on quality and broad diversification.
Authors:
Franz Paul Triebe
Tobias Wagner
Editorial deadline: September 30, 2026
The prices used in our analysis are end-of-period prices. The figures used for our valuation model are estimates referring to dates and therefore carry a risk. These are liable to change without notice. The use of valuation models does not rule out the risk that fair valuations over a specific investment period cannot be attained. A com plex multitude of factors influences price developments. Unforeseeable changes could, for instance, arise from technological innovations, general economic activities, exchange-rate fluctuations or changes in social values. This discussion of valuation methods makes no claim to be complete. Dreyfus Sons & Co Ltd, Banquiers has published Compass four times a year since June 2008. The publication is aimed at clients of the bank and interested parties. It describes some of the instruments and methods the bank uses to monitor everything to do with the financial markets. A description of the investment process can be obtained from your client advisers or our website. Compass provides guidance but cannot take the circumstances of an individual portfolio into account. It is for information and marketing purposes.
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