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

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 01.10.2020

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 30.06.2020

Nouvelles perspectives d’investissement 2020 de l’UBP

L’économie globale à la croisée des chemins
Expertise 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.


A lire également

Expertise 21.11.2020

UBP Investment Outlook 2021

Le Meilleur des Mondes

Expertise 09.11.2020

Will Chinese domestic consumers become the next global growth engine ?

China revealed the key themes of its upcoming 14th Five-Year Plan (14-FYP) and long-range objectives through the year 2035. The Fifth Plenum took place amid signs of stronger economic recovery, with better performance spilling over onto the domestic sector.
Expertise 02.11.2020

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.