Swiss Covered Bonds (Pfandbrief): Any thoughts?

Investing / Portfolios
1

Hi fellow mustachians,

I wanted to add some bonds to my portfolio and I was researching bonds in Switzerland. I just discovered that there were Swiss covered bonds, apparently called Pfandbriefe. They seems to have a better yield than regular Swiss government bonds (although that remains very low as well).

Does someone has any experience on them ?

Do you own Swiss bonds (directly or in ETF) ? Seeing the current state of Switzerland bonds, it seems almost pointless to own some now :frowning:

Thanks

The Poor Swiss

2

YOu mean like this one

https://www.google.ch/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0ahUKEwjz-qaepeDZAhXJWSwKHQkMAIkQFggnMAA&url=https%3A%2F%2Fwww.swissfunddata.ch%2Fsfdpub%2Fdocs%2Ffsm-8172_24_01-20170930-en.pdf&usg=AOvVaw3dEkqTxqVaJCs-x0McZYGe

Yield to maturity 0.08%

That’s a slap in your face, not a serious investment proposition.

Pay the money early to the tax office, yield: 0.5% and IMHO it’s more creditworthy than a random mortgage taker - you’ll continue paying your taxes to them year, after year, after year
 Not as a good as SNB who can just print you your money, but still.

I wanted to add some bonds to my portfolio

Why?

The only way it’ll make you any money is if the rates go down even further. Ok, we’ve learned not long ago that 0% is not the absolute floor, but it can’t continue forever. Sooner or later, I hope, inflation finally spins up and both the bonds and your money in them would lose value. Even if it stays glued to zero, well, you’ll still lose money here to management, trading fees and last but not least the taxes

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3

And TER of 0.2%, you loose 0.12 % per year but will get a taxable income.
Not a great deal.
Leave the money on an account, up to 100 KCHF it is guaranteed and has no expenses.

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4

Thanks for your answers!

I didn’t really want to invest in this kind of bonds, but just discovered it and just wanted a few opinions.

The reason I want to invest in some bonds is to reduce volatility of my portfolio and also be able to rebalance in case of a new bear market. But it seems this is not really popular over here.

5

Popularity has absolutely nothing to do with it, it’s minimal common sense!

So stay in cash, what’s the problem? Same 0% yield with practically no risk

This is one thing where you have an edge over institutional investors - those guys can’t just park the money at a bank and hope to get it back in one piece after a while: bank blows up, the money’s gone. That’s why some of them cough up north of 0.7% interest for SNB’s bonds. If times get tough, SNB can at least print them their money, unlike a random bank. As a small private investor you get to enjoy some deposit protection on your bank account, so it’s pretty dumb not to use it and follow institutional route of paying todays’s obscene negative interests.

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So I guess the logical consequence would be that some persons worth upward of 1 million CHF have an account in multiple banks, and 100’000 parked in each of them?

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Yes! And another consequence is that some pension funds store cash in several safes in different banks.
https://www.cash.ch/ratgeber/bunkern-pensionskassen-wirklich-bargeld-356953
It is the reason why the negative interest is difficult to push lower than -0.75% because such strategies would be so attractive that the savings would literally flow out of the balance sheet of the bank and end in a steel box in the second underfloor.

8

OK so now I understand a theory I once read, that [tinfoil hat mode on] the governments want to get rid of cash in order to push negative interest rates [tinfoil hat mode off].

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Well, to be honest there’s a total limit to swiss deposit protection - 6B, and the missing money would have to come back from other banks in the system, so there’s a small chance you won’t get even the first 100k back. And then some (but not all) cantonal banks also have an additional unlimited cantonal guarantee. There’s though again a small question of whether the canton itself would be in a position to cover a major collapse of its own bank. ZKB’s balance sheet is order or two bigger than ZH’s tax revenue for example. SNB on other hand has exclusive access to the money printers, so normally people assume it to be undefaultable. History knows a few example of central banks which have defaulted on their currency in the past however


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10

To reduce volatility you can buy bond ETF (like BND) or REIT ETF (like VNQ) or other bond substitutes, e.g. high-dividend stocks ETF (like VYM). Bonds are not great deal these days, but if I were going to retire today, I’d most likely diversify some portion of my portfolio into these three ETFs. At this stage of my life though I’m 100% in stocks.

11

So now this probably make more sense to investigate (YTM of 2% for 7y avg duration)

Anyone has experience with Pfandbrief? Seems like there’s no fund/etf available (there used to be an UBS one but it closed), but it should be tradable in 5k chunks on SIX. Anyone knows what the typical spread is?

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12

Why not go for Kassenobligationen, which yield more than that for a shorter time period?

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Aren’t they illiquid (locked deposit), while Pfandbrief are tradable bonds?

(2y locked might be a bit too much for me)

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Got the 2% from https://www.six-group.com/dam/download/market-data/indices/factsheets/six-factsheet-stat-sml14p-en.pdf

(no nzz account so can’t see your link)

17

Swiss Pfandbriefe can be a good option for better yields, but Swiss bond yields, in general, are pretty low. It’s all about finding that balance.

18

Does anybody know how to actually buy those Pfandbriefe? I found some which seem to be traded on SIX, but I can’t find them on IBKR. Also on SIX it says for all of that that the minimum order is 5000 (CHF or shares?).

E.g. this one seems interesting to me: CH1319968611

19

What kind of returns p.a.can/are you expecting with that? Before tax, let’s say.

20

1.4% (before any taxes) for the next 10 years? Or am I missing something?

Basically I was expecting the current saving-accounts interest, but locked in for 10 years.

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1.4% is the coupon. Do they trade at 100%? 10y confederation bonds have a 0.7% yield so I don’t expect a 1.4% yield for same duration and similar risk profile.

edit: looks like it trades around 100, so yes it should work.

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22

Sorry, I didn’t mean to make it sound like I’m “testing” you. I am just also looking for “cash/bond” options, and asking you was easier than googling etc myself :blush:.
1.4% is ok’ish.
PS I know not your question, but if you want 10y locked in, maybe consider Obligationen from/at Cembra (2% currently). No fees there either, quite safe due to esisuisse protection up to 100k. Very locked-in for duration though.