Download ETF Swiss Bonds WP Eng Jun 12

July 2012
Swiss Government Bonds – flight to safety
The last few weeks have been marked by significant volatility in the equity
markets. This is mainly attributable to the worsening problem of the Spanish
national debt, as well as continuing political uncertainty in Greece. A flight
to safety effect can again be seen in investor purchases of asset classes
commonly considered ‘safe’, such as highest quality government bonds.
Pressure on the euro has also risen considerably. The Swiss National Bank
was forced to defend the exchange rate peg at great expense in May,
acquiring foreign currencies equivalent to CHF 66 billion. Most of this was
used to defend the EUR/CHF floor – a sign that investors are seeking safety
in the Swiss currency.
An investment in Swiss government bonds using the CS ETF (CH) on SBI
Domestic Govt. 7–15 could be an attractive investment in the current
environment:
 Given the uncertainties in the Eurozone, Swiss government bonds could
prove a safe haven, while also generating good returns.
Contact
Credit Suisse AG
Asset Management
CS ETFs
Kalandergasse 1
8070 Zurich
Switzerland
Hotline: +41 44 333 68 68
E-Mail: [email protected]
www.csetf.com
 In a worst-case scenario, such as a Greek exit from the euro, the flight into
the Swiss franc would be likely to escalate even further. The performance
of Swiss government bond ETFs would be set to benefit.
 If this scenario were to occur, Swiss franc interest rates would be likely
to fall or remain stable. Long-term bonds would then benefit even more.
 For foreign investors using the euro as their investment currency, Swiss
bond ETFs could be attractive from a currency diversification perspective.
Euro-based investors will benefit from a stronger Swiss franc if pressure
grows, or if the removal of the EUR/CHF floor occurs.
 Due to intraday trading, ETF positions can be adjusted rapidly – particularly
relevant in volatile times.
Swiss Government Bonds – flight to safety
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Figure 1 – Currency reserves in Switzerland
350
300
250
200
150
100
0
Jun 2010
Jul 2010
Aug 2010
Sep 2010
Oct 2010
Nov 2010
Dec 2010
Jan 2011
Feb 2011
Mar 2011
Apr 2011
May 2011
Jun 2011
Jul 2011
Aug 2011
Sep 2011
Oct 2011
Nov 2011
Dec 2011
Jan 2012
Feb 2012
Mar 2012
Apr 2012
May 2012
50
Currency reserves in Switzerland (CHF billion)
Source: SNB/Credit Suisse
Swiss government bonds – stable yields
Swiss government bonds have a high credit rating, offer stable returns and
have enjoyed a considerably better performance since January 2010 than the
most important equity markets (see figure 2). Particularly in turbulent times –
such as the Italian debt crunch of July 2011 or Spain’s debt problems in May
2012 – and throughout considerable losses in the equity markets, Swiss
government bonds have provided rising total return performance.
Figure 2 – Performance of Swiss government bonds versus equities
Italian
debt crisis
120
Spanish
debt crisis
110
100
90
CS ETF on SMI
CS ETF on SBI Dom. Gov. 7–15
MSCI World TR
13.04.2012
13.01.2012
13.10.2011
13.07.2011
13.04.2011
13.01.2011
13.10.2010
13.07.2010
13.04.2010
70
13.01.2010
80
CS ETF on SMIM
CS ETF on MSCI Europe
Source: Credit Suisse, daily total return performance
Table 1 – Performance and Risk
CS ETF
on SMI
CS ETF
on SMIM
Annualized
return
-0.70%
-2.67%
Annualized
volatility
17.03%
19.58%
CS ETF on SBI
CS ETF on MSCI World
Dom Gov 7–15 MSCI Europe
TR
6.78%
0.88%
2.23%
4.35%
19.76%
18.47%
Historical returns and financial market scenarios are no guarantee of current or future performance.
Swiss Government Bonds – flight to safety
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Swiss government bonds with a high coupon
In an environment of falling or stable interest rates, investments with longer
terms can be attractive due to the higher interest rates they offer in
comparison to investments with shorter terms. Swiss government bonds
generally also offer a high coupon (2% or more) and in return trade above
par, meaning that the coupon portion of the total return is relatively large.
The investor can therefore benefit in the long term from a fixed return that
is independent of interest rate developments.
Table 2 – Overview of the composition of CS ETF (CH) on SBI
Domestic Govt. 7–15
Position
Coupon %
Maturity
As % of assets
Swiss Fed.
3.000
12.05.19
28.36
Swiss Fed.
4.000
11.02.23
24.00
Swiss Fed.
2.250
06.07.20
21.30
Swiss Fed.
2.000
28.04.21
15.03
Swiss Fed.
2.000
25.05.22
11.32
Source: Credit Suisse
Current yield on the 10 year Swiss government bond: 0.56%
Compared to other bond markets – real return is still positive
Depending on the term and the market, government bonds with good
creditworthiness have had a negative real return for some time. This is mainly
due to very low nominal interest rates. Investors are compensated with less
inflation and therefore earn a negative return in real terms. In other words,
investors are currently willing to pay in real terms in order to entrust their
money to a debtor. This hugely reduces the interest in bond investments.
Swiss government bonds with long terms (10 years) are the exception here.
Due to very low inflation, 10 year Swiss government bonds offer a positive
real return. This is not the case with European or American government
bonds, where the real return is considerably negative and investors are not
compensated for their risk (-1.4% in the Eurozone; -0.7% US; see figure 3).
Figure 3 – 10 year real return in Switzerland, the euro zone and in
the US
7
6
5
4
3
2
1
0
-1
-2
-3
05.03.2007 05.03.2008
Switzerland
Eurozone
US
05.03.2009
05.03.2010 05.03.2011
05.03.2012
Source: Credit Suisse
Historical returns and financial market scenarios are no guarantee of current or future
performance.
Swiss Government Bonds – flight to safety
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Low correlation with equities offers diversification potential
Swiss government bonds have historically had a very low correlation to
equities. The correlation to the MSCI World Index was -0.44 over the period
under review. It also remained relatively constant during this time frame (see
figure 4) and was almost always negative. During both the Italian debt crisis
in July 2011 and the Spanish crisis in May 2012, correlation fell to -0.9. This
is particularly significant from a portfolio perspective, as a low correlation
means an even greater diversification benefit, when adding Swiss government
bonds to a portfolio of equities.
Figure 4 – Correlation CS ETF (CH) on SBI Domestic Govt, 7–15
and MSCI World
Italian
debt crisis
Spanish
debt crisis
1
0.8
0.6
0.4
0.2
0
-0.2
-0.4
-0.6
-0.8
-1
30.06.2011 31.08.2011 31.10.2011 31.12.2011 29.02.2012 30.04.2012
20 days, Source: Credit Suisse
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