Swiss Covered Bonds (Pfandbrief): Any thoughts?

Investing / Portfolios
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I kind of got curious about exchange-traded bonds issued by “Pfandbriefzentrale der schweizerischen Kantonalbanken” and “Pfandbriefbank schweizerischer Hypothekarinstitute”. There are many more than issued by the Confederation, nice yields (from 0.8% p.a. according to Bond Explorer of SIX), big choice of maturity dates, many have low, but not zero, coupon.

Looks like a good choice to build a bond ladder or as a replacement for fixed term deposits, as they are liquid.

But first thing first: are they really very safe, as or almost as Confederation bonds?

25

The Pfandbriefe of both the Pfandbriefbank schweizerischer Hypothekarinstitute AG and the Pfandbriefzentrale der schweizerischen Kantonalbanken AG (the only two such issuers) are generally amongst the most secure investments you will find on this planet.

That is also why I would never consider them as an investment. There is next to nothing to be expected in return.

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27

Pfandbriefe are basically a Swiss type of a mortgage-backed-security (MBS). The special thing is that there is no true risk transfer, so the multi-layering is not the passing around of a hot potato (like the US did in 2008), but the accumulation of layers of security. Additionally, a significant part of the originators are state backed on top (too big to fail banks by the state in case of PBZ HI, the majority of the cantonal banks by their canton in the case of PBZ KB). Most importantly, by definition, these MBS only include prime mortgages (<65% LTV) with a decent term (>3 years) throughout Switzerland.

For a Pfandbrief to fail, the real estate market in CH would have to crash brutally and sustainably, the owners on a broad level would have to see their incomes slashed too (failing to service their mortgage), and the whole banking system would have to essentially collapse.

For a Bundesanleihe to fail, CH as a country or the CHF as a currency have to fail.

I consider this to be materially the same scenario and the higher yield on a Pfandbrief a market inefficiency. It’s like arguing on the nuance of the economic impact if a city killer size asteroid hits London vs New York - sure there is a difference in the minutiae, but it doesn’t matter at this scale.

PS: No investment advice, this is mostly from memory. I looked into this a few years ago.

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