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

Gestion discrétionnaire – vous êtes toujours aux commandes

Parce que vos objectifs sont uniques, nous vous proposons un service de gestion discrétionnaire exclusif.

Lire plus
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

Actualités les plus lues

Expertise 10.02.2021

Covid-19: Restez informés avec l'UBP

Depuis l’apparition du coronavirus, l’UBP accompagne et soutient ses clients dans le contexte inédit de cette crise sanitaire mondiale. La Banque vous informe régulièrement de l’adaptation de ses dispositifs aux règles de précaution fixées par les autorités et partage avec vous les dernières analyses de ses experts sur les conséquences de la pandémie pour l’économie mondiale et les marchés financiers.

Expertise 17.12.2020

UBP Investment Outlook 2021

Le Meilleur des Mondes

Expertise 24.11.2020

Des joyaux cachés parmi les SMID Caps suisses et européennes

Les sociétés de petite et moyenne capitalisation («SMID Caps») affichent traditionnellement des taux de croissance et des rendements supérieurs sur le long terme en comparaison des grandes capitalisations. Il est en effet plus facile de générer une croissance dynamique à partir d’une plus petite structure. Par ailleurs, les SMID Caps suisses et européennes offrent généralement aux investisseurs une exposition idéale aux grandes tendances de croissance séculaires.


A lire également

Expertise 06.05.2021

Why the Japanese market is performing well again

Japan’s equity markets have outpaced other major developed market equities in both 2020 and year-to-date in 2021 as the world seeks to transition to a post-pandemic recovery.

Expertise 04.05.2021

Positive performance defies volatile markets

The first quarter of 2021 was positive for most asset classes. However, financial markets were far from calm.

Expertise 29.04.2021

A defining moment for companies tackling climate change

The year 2021 may well turn out to be decisive for climate action.