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Swiss funds troubled by impact of negative 10-year bond yields

Institutional investors in Switzerland are not happy with the government issuing the very first 10-year bond in Europe with a negative rate but they see the need to adjust to the environment in the Eurozone surrounding the country.

The pension fund association ASIP pointed out in a statement: “Not only are risk-free bond investments denominated in Swiss Francs no longer yielding any return, they are even costing money.”

Last week, CHF230m (€187m) in 10-year Swiss government bonds were issued at a negative yield to maturity of -0.055%.

ASIP noted this “mirrored the difficult situation Pensionskassen are currently in” as it is becoming even harder to fulfil the liabilities.

Rolf Ehrensberger, CIO at the Swiss pension fund for the energy sector, PKE, said he was ”not surprised after all that had been happening over the last months” to see Switzerland become the first country on the European continent to issue 10-year government bonds with a negative interest.

But he added “impact on all savers, especially institutional investors, was considerable” and that this situation “could not have been imagined” a few years ago.

Ehrensberger, like many other investors, was convinced this low interest rate scenario would continue “for some time”.

He confirmed the PKE would not be buying 10-year Swiss government bonds but added it hardly had done so in the past few years: “Traditionally we have quite a high equity quota compared to other Swiss Pensionskassen.”

Currently 40% of the CHF9bn portfolio is invested in equity and this would probably not change, he pointed out.

Ehrensberger pointed out it “had been a good decision” to go strong into equities not only because markets were going well over the last years, but also because now the Pensionskasse does not have to chase the market and compete as much with other investors.

In fact, because of the regulatory cap on equities the PKE could even use the current market to sell some of its portfolio.

Eric Breval, chief executive at the Swiss Federal Social Security Fund (AHV), noted his first pillar buffer fund was “in a similarly very difficult situation as other institutional investors in Switzerland” given the ever lower interest rates .

He explained the first negative 10-year Swiss bonds were caused by the various quantitative easing measures and the fact that “Switzerland is considered a safe haven, especially in the middle of Europe”.

Breval pointed out they also reflected an “expected deflation” as bond investors were always looking at real returns.

Lukas Riesen, partner at Swiss consultancy PPCmetrics, confirmed consumer prices in Switzerland have dropped over the last twelve months by 0.9%.

This meant if investors believe in deflation over the long-term, “the expected real yield of this government bond paradoxically is still positive”, he explained.

Carl-Heinrich Kehr, principal at Mercer Germany, said from a non-domestic point of view,  investors “should not completely exit government bonds from safe issuers” given the volatility in equities and possible setbacks in corporate bonds.

However, especially for Switzerland, where the duration of the Swiss Bond Index currently stood at 7 years paired with a “very low yield”, he recommended to move more into satellite bond investments such as high-yield, senior loans, corporates or even into emerging market debt.

“It seems prudent to adjust to lower interest rates for a longer period, increase diversification into alternatives and expect possible temporary setbacks,” noted Kehr. 

Click here to read more about other challenges facing Swiss institutional investors in the liquidity segment. 

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