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

 

Newsletter

Sign up to receive UBP’s latest news & investment insights directly in your inbox

Click and enter your email address to subscribe

Investissement responsable

Quand l’investissement responsable crée de la valeur

Plus d'infromation sur l'investissement responsable UBP

Regarder la vidéo

Actualités les plus lues

Expertise 26.05.2017

Un contexte favorable aux convertibles

L’amorce d’une tendance.

Expertise 05.10.2017

Perspectives d’investissement 2018

Opportunités et risques dans un cycle économique en phase avancée.

 

Expertise 16.10.2017

Dette émergente : les préjugés ont la vie dure

Souvent perçues comme trop risquées, les obligations corporate émergentes en devises externes (hard currency) offrent pourtant des profils attractifs et un couple rendement-risque très compétitif. Avec l’amélioration des fondamentaux économiques, les flux d’investissement devraient continuer de croître sur cette classe d’actifs.

A lire également

Expertise 14.08.2018

Oil demand stays firm

WTI oil prices are down almost 10% since the beginning of July. At the beginning of August, oil prices started their longest weekly losing streak in three years. The US/China trade tensions fuelled concerns that global economic growth could slow, weakening worldwide energy demand.
Expertise 07.08.2018

A regime change ahead for global technology

Spotlight - An evolution in return drivers for global technology.

Expertise 30.07.2018

Exploiter les opportunités sur les marchés actions et gérer le risque obligataire

Les investisseurs ont commencé l’année avec optimisme après les performances remarquables enregistrées par la plupart des classes d’actifs sur 2017.