1. Newsroom
  2. How can investors obtain attractive yields in Swiss francs?
Menu
Insight 30.09.2016

How can investors obtain attractive yields in Swiss francs?

How can investors obtain attractive yields in Swiss francs?

Yields are currently negative not only on Swiss government bonds, but also on Swiss-franc investment-grade credit. However, negative yields do not have to be a disaster for Swiss-franc investors.


There are ways of improving prospective returns from a Swiss-franc bond portfolio, while maintaining an investment-grade risk profile and a moderate maturity. The first solution is the traditional method of hedging a euro- or dollar-denominated bond portfolio against exchange-rate risk. In the current environment, such hedging delivers higher yields for Swiss-franc investors without altering the investment’s economic risk (i.e. risk relating to the type of issuer, credit rating, maturity and exposure to interest rates). Using this method, a Swiss investor can take advantage of the positive yields available on investment-grade paper denominated in euros (+0.6%) and in dollars (+2.2%). Once hedged against exchange-rate risk, yields in Swiss francs are slightly positive. However, hedging costs are very high, for example 2.1% to hedge against movements in the US dollar/Swiss franc exchange rate. It is possible to make the solution more effective by using derivatives.

Avoid hedging costs

A second, more effective solution allows investors to avoid the cost of hedging against exchange-rate risk. It involves using standard, liquid derivative instruments. Using interest-rate futures and investment-grade CDS indexes, an investor can gain exposure to investment-grade credit bonds with a 5-year maturity that is economically similar to exposure resulting from buying traditional bonds, without the cost of currency hedging. The investment takes place directly in Swiss francs and the investor only has to pay the cost of liquidity in Swiss francs, i.e. 0.75% as opposed to 2.1% to hedge against USD/CHF movements (see illustration). Overall, this is a more attractive solution, enhancing returns from a Swiss-franc investment-grade credit portfolio.

Enhancing prospective returns by using derivatives

Currently, by using credit and interest-rate derivatives, investors can obtain a superior prospective return than through the traditional method of buying US-dollar bonds and hedging against exchange-rate risk, i.e. 1.6% versus 1.0% (carry and roll-down). This is the approach that Union Bancaire Privée currently favours regarding exposure to Swiss-franc investment-grade debt. The strategy has delivered a return of close to 3% since the start of the year.


DEBAT_Olivier_UBP_72dpi-0219.jpg

Olivier Debat
Senior Investment Specialist - Fixed Income Solutions

 

Expertise

Swiss & Global Equities

Why Swiss equities now? This market offers equity investors the stability and agility they need to navigate this volatile period. 

Read more
Expertise

European Equities

European equities offer unrivalled opportunities in terms of breadth of sector and market exposure.

Read more

Most read

Insight 01.10.2020

COVID-19: UBP keeps you up to date

Since this coronavirus appeared, UBP has provided its clients with guidance and support as we all tackle this unprecedented global health crisis. We give you regular updates on everything from our own safety protocols and the recommendations issued by the authorities to our experts’ latest analysis on the effects of the pandemic on the world economy and financial markets.

Insight 30.06.2020

UBP Investment Outlook 2020 Reset

The Global Economy at the Crossroads

Insight 24.06.2020

Market turmoil brings new opportunities for pragmatic investors

March 2020 was difficult time for many investors, as COVID-19 spread across Europe and the US, leading to sharp sell-offs in fixed-income credit markets. While such market turbulence is not to be welcomed, its occurrence can create opportunities.


Further reading

Insight 26.11.2020

European Small Caps – Rising Stars

Smaller companies as an exciting source of growth opportunities

Insight 24.11.2020

Hidden gems in Swiss & European small caps

Small and mid caps have traditionally recorded higher growth rates and investment returns over the long term than large caps: it is easier to generate a dynamic growth rate from a smaller base. Swiss and European small and medium-sized capitalisations – so-called ‘SMID caps’ – also tend to provide investors with ‘pure play’ exposure to major secular growth trends.

Insight 21.11.2020

UBP Investment Outlook 2021

A Brave New World