Reasons why Swiss investors should be invested in CHF bonds.
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Key figures about the swiss bonds market
Source: Pictet Asset Management, 31.07.2021
CHF bonds represent a diversified global asset class in terms of countries, sectors and type of issuers, including governments and private companies. It is a stable asset class, due to the high rating quality and the long-term client base. CHF bonds can, therefore, deliver return in normal interest rates environment and/or play a role in protecting multi-asset portfolios during challenging environments for global risky assets. Within the debt market, the volatility of CHF bonds is comparable to other bond asset classes, but tends to be much lower during important price corrections.
Return
CHF bonds have offered historically positive returns and stability over the long term. We illustrate the 10 years performance evolution of the 3 main Swiss asset classes: CHF bonds (Swiss Bonds Index AAA-BBB), Swiss equities (SMI) and Swiss real estate (SXI Swiss Real Estate Funds).
CHF Bonds offer stability in Asset-Mixed Portfolios
Total return evolution of Swiss asset classes
Source: Pictet Asset Management, 31.07.2021; CHF bonds: Swiss Bond Index AAA-BBB; Swiss equities: SMI Gross Total Return; Swiss real estates: SXI Real Estate Funds Total Return
Over time, CHF bonds show return and stability contribution in multi-assets portfolios. Despite the negative rates introduced by the Swiss National Bank at the end of 2014, CHF bonds managed to generate an annualized return of about 2% over the last 10 years.
Swiss Bonds had lower but positive return
Annualized total return per Swiss asset class 2011 - July 2021
Source: Pictet Asset Management, 31.07.2021 CHF bonds: Swiss Bond Index AAA-BBB; Swiss equities: Swiss Market Index Gross Total Return; Swiss Real Estates: SXI Real Estate Funds Total Return
CHF bonds have similar returns to other bonds asset classes
Annualized return per bonds asset class 2011 - July 2021
Source: Pictet Asset Management, 31.07.2021; CHF bonds: Swiss Bond Index AAA-BBB Global Bonds: Bloomberg Barclays Global Aggregate Total Return Index Hedged CHF; Investment grade-global bonds: Bloomberg Barclays Global Aggregate Corporate Total Return Index Hedged CHF; EM global bonds: JP Morgan Government Bond Index Emerging Markets Global Core Hedged CHF
Protection
CHF bonds remain an important and core asset class in multi-assets portfolios due to their defensive risk profile, generally measured by the volatility and drawdown. Compared to real estate and equities, CHF bonds show only a small fraction of risk, justifying its crucial role in terms of diversification and capital protection.
CHF bonds have lower volatility and lower drawdown than other swiss asset classes
Chart left: Annualized volatility per Swiss asset class 2011 – July 2021
Chart right: Maximum drawdown per Swiss asset class 2011 – July 2021
Source: Pictet Asset Management, 31.07.2021; CHF bonds: Swiss Bond Index AAA-BBB; Swiss equities: Swiss Market Index Gross Total Return; Swiss real estates: SXI Real Estate Funds Total Return
Compared to other bonds asset classes over the past years, Swiss bonds also show attractive risk and return profile in Swiss francs, with lower volatility and smaller drawdown for only a slightly lower annualized return.
CHF bonds have lower volatility and lower drawdown than other bond asset classes
Chart left: Annualized volatility per bonds asset class 2011 – July 2021
Chart right: Maximum drawdown per bonds asset class 2011 – July 2021
Source: Pictet Asset Management, 31.07.2021; CHF Bonds: Swiss Bond Index AAA-BBB Swiss Real Estates: SXI Real Estate Funds Total Return
Outlook
The main risk of CHF bonds going forward is an increase in interest rates which would negatively affect bonds prices. However, an increase of interest rates represents a risk for financial assets in general. Correlated downturns will be the more pronounced the more interest rates increases are due to higher inflation than higher growth. Moreover, some asset classes can be more sensitive to interest rates movements than the CHF bonds. For instance, real estate trends show a closer relationship to interest rates than bonds. Equities tend also to react more negatively when interest rates increase is caused by more by inflation than growth.
*Total return = current yield to maturity - total rate change * duration; Source: Pictet Asset Management, as of 31.07.2021
We would recommend to investors considering an allocation to CHF bonds not to base their decision on yield-to-maturity, but to consider the expected total return. To calculate the effective expected total return of a bonds portfolio, an investor should add two additional factors to yield-to-maturity: the impact of cash flows reinvestment in the portfolio to a higher yield than cash and the technical price gain resulting from decreasing yield of all non-maturing bonds over the year, the so called roll-down effect. As shown in the table above for main Swiss bond indices, the yield to maturity strongly underestimates the expected total return over the coming 12 months.
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