Institutional investors in Switzerland are far from happy their government has issued the first 10-year bond in Europe with a negative rate, although they are fully aware of the economic realities that have led to this situation.
The pension fund association ASIP gave a curt reaction to the news. “Not only are risk-free bond investments denominated in Swiss francs no longer yielding any return, they are even costing money.”
In April, CHF230m (€187m) in 10-year Swiss government bonds were issued at a negative yield to maturity of -0.055%. ASIP notes that this mirrors the difficult situation Pensionskassen are currently in and that it is becoming even harder to meet liabilities.
Rolf Ehrensberger, CIO at PKE, the Swiss pension fund for the energy sector, says he is not surprised, given recent developments, by the 10-year issue. His view is that the impact on all savers, especially institutional investors, is considerable, and that this situation could not have been imagined a few years ago.
Ehrensberger, like many other investors, is convinced low interest rates will persist for some time. He says the PKE will not be buying 10-year Swiss government bonds but adds this is not a change from its stance over the past few years. “Traditionally we have quite a high equity allocation compared with other Swiss Pensionskassen,” he says. Currently 40% of the CHF9bn portfolio is invested in equity and this will probably not change.
Ehrensberger is pleased with the outcome of the decision to go into equities, not only because they have performed well in recent years, but also because now the Pensionskasse does not have to chase the market and compete so much with other investors. In fact, because of the regulatory cap on equities, the PKE can use the current market to sell some of its portfolio.
Eric Breval, chief executive at the Swiss Federal Social Security Fund (AHV), notes that his first-pillar buffer fund is in a similarly very difficult situation as other institutional investors in Switzerland given the ever lower interest rates.
He points out that 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. Breval adds that they also reflect an expected deflation as bond investors are always looking at real returns.
Lukas Riesen, partner at Swiss consultancy PPCmetrics, notes that consumer prices in Switzerland have dropped over the last 12 months by 0.9%. This means that if investors believe in deflation over the long term “the expected real yield of this government bond paradoxically is still positive”, he explains.
Carl-Heinrich Kehr, principal at Mercer Germany, says that 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 stands at seven years paired with a “very low yield”, he recommends moving more into satellite bond investments, such as high yield, senior loans, corporates and even emerging market debt.
According to Kehr: “It seems prudent to adjust to lower interest rates for a longer period, increase diversification into alternatives and expect possible temporary setbacks.”
And it’s not only Swiss investors who might expect “possible temporary setbacks” in the near future. Over the border in Germany, in mid-April, bund yields also flirted with negative territory, falling as low as 0.051% (16 April).
At the time of going to press, yield declines in Germany left some speculating the country could be the euro-zone’s first to issue a 10-year bond with a negative yield.