One of the primary objectives that individuals strive to achieve is the development of a diversified and lucrative investment portfolio. Possessing such a portfolio is crucial, whether the economy is in a growth stage or experiencing a recession. Therefore, it's vital to construct a portfolio that can withstand sharp declines in value and thrive under any economic conditions, all while generating a stable income. This is why investments in bonds have consistently been a cornerstone in pursuing this ultimate goal.
Best Swiss Bonds to Invest in the Current Market
Feb 2023What are the benefits of bond investing?
Bonds and stocks are the primary investment assets in the global investment market. Uninformed investors may be surprised, but despite the overall lower long-term return, bonds are the most popular investment. As of 2021, the total market capitalization of domestic companies listed on stock exchanges worldwide exceeded the total market capitalization of the bond market (total debt outstanding). The gap widened in 2022 as stock prices fell. As a result, bonds have become likely the most popular financial instrument for investment in the world.
Capitalization of the global equity and bond markets at the end of 2022 (in USD trillion)
Source: Securities Industry and Financial Markets Association (SIFMA) and Statista
Diversification
If you want to invest in the stock market, keep the investing rules in mind. One of them is that, when creating an investment portfolio, it is critical to maintain the proper balance of profitability and reliability. During periods of rapid market growth (such as 2020-2021), it is preferable to invest in riskier assets such as equities and cryptocurrencies. Instead, when financial markets fall (as happened in 2022), it is better to invest in more stable assets such as bonds, real estate, and gold. Over the long term, high-quality bonds have tended to offer better diversification against volatile stocks and higher yield potential than cash.
Reduced volatility and increased transparency
Bonds are also a good investment for those who dislike sudden market movements and changes in asset values, as well as those who count on stability and a predictable income with a low level of risk. Bonds are generally less volatile than stocks. Bond values can fluctuate depending on current interest and inflation rates, but they are typically more stable than stocks.
As inflation in Switzerland reached 2.8% in December 2022 (down from 3.5% in August 2022), the Swiss National Bank raised its policy rate by 50 bps to 1% at its December meeting. In response to this rollercoaster, the SMI index fell 6.51% from the end of January 2022 to the end of January 2023. At the same time, Switzerland’s 3-year bond yields rose from -0,335% to 1.055%.
Another advantage of bonds over stocks is that in the event of bankruptcy, you have a better chance of recovering at least a portion of your invested funds as a bond investor. Given the impeding recession, this factor is critical to consider when considering portfolio allocation in the current market envimoment.
While stocks are not risk-rated, bonds are typically rated by agencies such as Standard & Poor's or Moody's. This allows investors to understand how much risk they are taking on when purchasing a bond, with riskier bonds offering higher coupon rates.
Moody’s, S&P, and Fitch credit ratings scale for corporate bonds
Source: Wolf Street
The expected return of a bond, like any other investment, must be balanced against its risk: the riskier the issuer, the higher the yield investors should demand. Junk bonds (high-yield bonds), as a result, pay higher interest rates but are also more likely to default. Governments pay very low-interest rates but often have almost no risk.
Additionally, experienced investors suggest structuring your investment portfolio depending on your age. Bonds should be a larger part of your portfolio as you get older. And vice versa: the younger you are, the more it makes sense to take risks and invest in stocks. According to a popular belief, the percentage of stocks in your portfolio should be equal to 100 minus your age. So, if you're 30, you should have 70% stocks and 30% bonds in your portfolio. If you're 60, you should have 40% stocks and 60% bonds.
Fixed returns
Investors will receive the same predetermined interest rate each period (usually twice or once a year) that they own bonds. However, the yields depend on the price at which the bonds were purchased and the term until maturity. In that case, now is a good time to buy bonds because prices are lower than they have been in recent years. This means that the yield on bonds purchased now will be higher than the yields on bonds purchased from 2012 to the first half of 2022.
Bonds are more profitable than bank deposits and cash
Bonds’ main purpose is to cover the level of inflation with their yield rate. That is, their owners may not lose the value of their resources over time. In 2022, the situation changed, with inflation rapidly rising while bond yields also rose. The 10-year Swiss Confederation bond yields increased from -1.0% in August 2019 to 1,263% at the beginning of January 2023.
The Switzerland 10-Years Government Bond Yield
Source: Investing.com
Liquidity
In times of high market volatility and uncertainty, the liquidity of your portfolio may become its most important feature. Generally, the bond market is considered to be liquid. Bond liquidity, for example, is superior to that of real estate. At the same time, keep in mind that different types of bonds have varying levels of liquidity. Government bonds are more liquid than corporate bonds. Liquidity also depends on market conditions and the size of the bond lot (which can be worth CHF 10’000, CHF 50’000, CHF 100’000, or even more). The larger lot you purchased, the less liquid it will be.
Why invest in Swiss Bonds?
Protection
Swiss bonds remain an important asset class in multi-asset portfolios due to their low volatility and drawdown. They show only a small fraction of the risk of real estate and equities, justifying their critical role in terms of diversification and capital protection.
Furthermore, Switzerland's government (as well as its bonds, which are discussed below) has the highest credit ratings possible: triple-A ratings from Standard & Poor, Moody's, and Fitch, with a stable outlook.
Return
Swiss bonds have historically provided positive returns and stability over the long term. Since 1994 and until 2023, the yield on Swiss government bonds has varied (from -1.0% in 2019 to +5.63% in September 1994). However, their long-term profitability always remained positive, and they were a preferred asset in portfolios of the world's leading investors.
Swiss bonds contribute to the return and stability of multi-asset portfolios over time. Swiss bonds offer comparable returns to other government bonds. Despite the Swiss National Bank’s introduction of negative rates at the end of 2014, Swiss bonds managed to generate an annualized return of about 2% over the last 10 years. The creation of special ETF funds, such as the iShares Swiss Domestic Government Bond 3-7 ETF (CH) by the world's largest asset manager, demonstrates the importance of Swiss bonds.
Strong currency
Compared to other government bonds, Swiss bonds had a more attractive risk and return profile in Swiss francs, with lower volatility and a smaller drawdown for a slightly lower annualized return. Despite the fact that rising US interest rates have prompted traders to sell currencies such as the yen, the Swiss franc has managed to remain a safe haven.
So, which Swiss bonds should you be looking at now?
Best Swiss bonds to invest in
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1. Swiss government bonds
Swiss government bonds are one of the most reliable and least risky investment options. As of 2022, the yield of Swiss government bonds was insufficient to cover the high inflation of up to 3.5%, but in the long run (as global inflation is expected to fall in 2023), this could be achieved. As a result, unlike when purchasing shares, investors will not lose the purchasing power of their savings (the first half of 2023 should still be quite volatile for financial markets). Therefore, investors may wish to consider purchasing two types of Swiss government bonds:
1) Switzerland Government Bond 10Y (yield as of December 2023 is approximately 0.74% per annum);
2) Switzerland Government Bond 2Y (yield as of December 2023 is approximately 1.16% per annum).
Both of these instruments have a relatively high level of liquidity. The specific choice of one of them is defined by your investment objectives. If you intend to use funds in two years, it is preferable to buy shorter-term bonds. If you have a long term investment strategy, 10-year bonds are more profitable. Once inflation is under control, you can sell both at a profit, increasing the expected return on your investment.
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2. Municipal (cantonal, city) bonds
Municipal (cantonal, city) bonds are the next type of bonds to consider investing in. They are issued by cantonal or municipal governments and have a lower level of investment risks, a stable price, and a slightly higher rate of return than federal government bonds. Among such bonds, we can present the following bonds, which are actively traded on the SIX stock exchange and have a sufficiently high level of liquidity:
Issuer: Canton of Basel-Stadt
Maturity date: 22.12.2028
Price (as of 12/10/2023): 100.30% of nominal value
Coupon rate: 1.200% (paid annually)
Yield: 1.16% per year
Minimum tradable unit: CHF 5’000
Issuer: City of Bern
Maturity date: 26.09.2025
Price (as of 01/05/2023): 102.60% of the face value
Coupon rate: 2.500% (paid annually)
Yield: 1.39% per year
Minimum tradable unit: CHF 5’000
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3. Social bonds
You can also choose to be socially responsible by buying Social Bonds. This is a contract with the public sector or governing authority under which it pays for improved social outcomes in specific areas while passing on part of the savings to investors. We recommend that you take a look at the following bond:
Issuer: Canton of Basel-Stadt
Maturity date: 21.07.2028
Price (as of 12/10/2023): 101.80% of nominal value
Coupon rate: 1,500% (paid annually)
Yield: 1.13% per year
Minimum tradable unit: CHF 5’000
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4. Swiss corporate bonds
A wide range of corporate bonds are available on the Swiss Stock Exchange. Despite the fact that we do not recommend purchasing corporate bonds with longer maturities because financial stability in the corporate sector can change quickly, our recommendations include (the most liquid and profitable of them):
Issuer: Givaudan SA (Switzerland-based multinational manufacturer of flavors, fragrances, and active cosmetic ingredients. Currently, it is the world's largest company in the flavor and fragrance industries, with around 25% market share.)
Maturity date: 19.03.2024
Price (as of 12/10/2023): 99.99% of nominal value
Coupon rate: 1.750% (paid annually)
Yield: 1.75% per year
Minimum tradable unit: CHF 5’000
Issuer: Axpo Holding AG (Switzerland's largest producer of renewable energy and an international leader in energy trading and the marketing of solar and wind power)
Maturity date: 26.02.2025
Price (as of 12/10/2023): 101.43% of the face value
Coupon rate: 3.125% (paid annually)
Yield: 1.99% per year
Minimum tradable unit: CHF 5’000
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5. Green bonds
If you want to not only invest but also support environmental protection projects, you can also buy a variety of Green Bonds in Switzerland (around 64 names on the Swiss stock exchange).
The term “Green Bond” refers to a sustainable fixed-income instrument that raises funds to fund projects with positive environmental and/or climate benefits. Green bond issuance is limited to complying with the International Capital Market Association’s Green Bond Principles. The green bonds market is rapidly expanding and expected to grow at a CAGR of 9% per year. We recommend that you look into these green bonds with a medium maturity and a relatively high yield:
Issuer name: Bâloise (Insurance company headquartered in Basel, the third-largest Switzerland all-industry insurance service provider for individuals and businesses)
Maturity date: 19.07.2028
Price (as of 12.10.2023): 101.75% of the face value
Coupon rate: 1,900% (paid annually)
Yield: 1.58% per year
Minimum tradable unit: CHF 5’000
What do you earn in line with all pros?
So, to summarize, investing in bonds is much more attractive now than it was 3–5 years ago. At the same time, you should be aware that investing in bonds also has some drawbacks:
- The long-term return of equities and some other asset classes is significantly higher than that of bonds, as shown in the chart below;
- Bonds are less liquid than stocks, owing to the fact that you can hold them until maturity;
- Bond market value may fall when interest rates rise, as we saw in 2022. Selling them during such times may result in the loss of some part of your investment;
- Prepayment risk is the inverse of interest rate risk. Companies may buy back all of their outstanding bonds and issue new bonds at a lower coupon rate if interest rates suddenly fall after a bond is purchased.
Long-term growth of USD 1: stocks vs bonds vs inflation
Source: Darrow Wealth Management
Alternative investments, such as high-yield bonds, are recommended to avoid all the investment disadvantages mentioned above and to diversify your investments.
High-yield bonds may provide investors with a number of potential benefits, including the ability to earn significantly higher returns than traditional corporate and government bonds. Because high-yield bonds typically have a low correlation to investment-grade fixed-income sectors such as Treasuries and highly rated corporate debt, adding high-yield securities to a broad fixed-income portfolio may improve your portfolio diversification. Diversification does not guarantee against loss, but it can help reduce overall portfolio risk and improve return consistency. We have the following high-yield Swiss bonds for your consideration:
Issuer name: Le Bijou, a Swiss company that creates tech-enabled apartments that transform buildings into cash flow powerhouses.
Maturity date: 5 years
Price: 100% of the face value
Coupon rate: 7.125% per year (paid monthly)
Minimum subscription: CHF 25'000
Learn more at https://moonshot.ch/investment/7125-fixed-annual-return/.
Issuer name: Amēa Villas, a Swiss developer of modern, laid-back luxury villas for the conscious, affluent traveler looking for a place to live in the moment and practice mindful living.
Maturity date: 4 or 7 years
Price: 100% of the face value
Coupon rate:
- Conditionally Secured Bond – 2.23% or 3.28%* p.a. (paid monthly)
- Senior Corporate Bond – 4.15% or 6.25%* p.a. (paid monthly)
- Convertible Corporate Bond – 7.40% or 8.12%* p.a. (paid monthly)
Minimum subscription: CHF 25'000
Learn more at https://moonshot.ch/private-debt-overview.
*The return depends on the maturity date of the bond, the longer the term to maturity, the higher the coupon rate.
Conclusion
Stocks and bonds are not the only tools for successful investing, and the year 2022 has demonstrated how unpredictable financial markets can be. That is why it is important to remember the “golden rules” of investing, among which “the need to diversify your investment portfolio” plays a significant role.
“From my previous failures, I knew that no matter how confident I was in making anyone bet, I could still be wrong — and that proper diversification was the key to reducing risks without reducing returns.” — Ray Dalio
The diversification rule requires that the investment portfolio be expanded not only with stocks and bonds, but also with other financial instruments. We recommend you to think about alternative investments in particular because they provide:
- Competitive risk-adjusted returns (higher than bonds);
- Inflation hedges (for instance, bond prices are going down in periods of high inflation and high-interest rates). Some alternatives, such as gold or real estate, can be effective in mitigating inflation risk;
- Diversification. Including alternatives in a portfolio can improve diversification because of the low correlation to stock or bond markets.
We mentioned the exquisite market opportunity with an income that exceeds most existing Swiss bond yields, with the innovative and progressive Le Bijou and Amēa Villas companies as examples of alternative investments. The companies issued a set of bonds with fixed interest yields of up to 7.125% and 8.12% to fuel their further expansion, improve operations, and unlock new destinations and properties.
So, the bottom line is: Bonds are widely regarded as one of the most attractive investment instruments on the market for those seeking a stable and modest return on investment. However, there are risks associated with any type of investment. Bonds may be suitable for you if you require consistent cash flow. If you want to earn 10-11% returns year after year, investing solely in bonds will not get you there. As a result, you should ensure your portfolio includes some diversification in the form of alternatives.
