Don't expect excitement
Swiss franc bonds have traditionally been a safe haven and commensurately unexciting. And nothing much has changed with the introduction of the euro.
The flight to quality that characterised investor sentiment in the last quarter of 1998 has not been maintained in the first few weeks of this year. Yield spreads have been narrowing once more as investors see that much of the fear that surrounded the euro has, so far, been unfounded. So European bonds have performed better than the Swiss market. But according to Daniel Knuchel, head of fixed income at Credit Suisse in Zurich, the soft landing of the euro is not the only reason for a worsening of Swiss franc bonds' competitive position: While it is a reflection of the fact that some of the doubts about the new currency have receded, the narrowing of spreads between the Swiss franc and euro-zone bonds is also a reflection of the growing belief that Switzerland will be joining the EU. There is a significant belief that this will happen on the political side."
The average spread between German and Swiss bonds has fallen over the past 12 months from between 175 to 200 basis points to 125 to 150.
However, Knuchel says the spreads will never converge because the risk premium on the euro basket will remain and the Swiss franc will still be seen as a safe haven. "The euro is still in its honeymoon period, but I think the premium will always be there." The Credit Suisse Swiss franc bond fund has been moving the portfolio down the investment scale, with 50% of total assets invested in AA-rated paper, 34% in AAA and the balance in A-rated issues. New money flows continue to be directed to medium-dated paper, where the managers achieve the maximum roll-down effect along the yield curve. Richard Newell"