Unhedged usd bond

a simplified example with two options:

a) buy 100k of a 2yr usd gov bond yielding 4.5%

return: 4.5k usd gross ./. 1.5k tax (33%) = 3k usd

b) buy 100k of a 2yr chf gov bond yielding 1.5%

return: 1.5k chf gross ./. 0.5k tax (33%) = 1k chf

so, usd/chf would have to lose 2/3 for it to be a bad deal, no? am i having a blackout?


Correct if you only compare the returns. But you forgot to take into account the original investment of 100k. If USD/CHF looses 2/3, you also loose 66k (in CHF) on the investment.


it was a blackout! :smiley: thx

[i nominate my own post for the hall of fame, lmao]

It might be obvious but thought I mention it: as long as @oslasho does not exchange the 100k USD back to CHF he’s fine and he could re-use the 100k USD to re-balance his portfolio by for example buying some VT which is also in USD. As far as I understand there is then no currency risk.

In the hypothetical example of USD/CHF losing 2/3, they would still only be able to buy a third of the number of ETF shares, compared to what they could buy with the CHF 100k repayment of the CHF bond.

I.e., there is definitely a currency risk when investing in unhedged foreign currency bonds.

The ETF trading currency is irrelevant, except for currency exchange fees. There would be no advantage in e.g. buying VWRD in USD compared to exchanging USD to CHF and then buying VWRL in CHF, if we ignore fees.

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Right thanks for the precision, I forgot that it goes in both ways so if USD/CHF loses then CHF/USD gains which means I get more USD for my CHF and hence can buy more VT…

There is no free lunch. USD is expected to lose value against CHF according to the inflation and federal interest rate difference of the US and Switzerland.

Meaning if 10 year US treasuries yield 5% and 10yr Swiss government bonds yield 2%, the interest rate difference stays at 3% on average, both will return the same as the USD will devaluate ~30% over those 10 years.


There still is: it’s the risk of the ETFs constituents.

Despite the USD being a global reserve and trading currency and international companies hedging some of their their currency exposure, an overproportionate part of the index and fund represents U.S. domestic business.

In theory.
Maybe even in practice.

But we should keep in mind that this is calculation is true before taxes.

As a personal investor, you will pay tax on the coupon payment, which will likely be a significant drag on your return. Whereas gains purchasing power due an appreciating currency or even currency exchange are (usually) tax-free for Swiss personal investors.

:point_right: That’s why a lower-coupon CHF government bond would be preferable in this example - in fact, it would even be preferable if the yield was somewhat less than 2%.

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what’s your approach to (geo) allocation?

Raiffeisen had a look at the diversification topic for Swiss investors, and concluded effective bond yields werent greatly impacted, but that there was no point diversifying equities out of Switzerland! Anlagestudie: Internationale Diversifikation

Im not sure I fully agree considering some of the sector imbalances, but the steady gradual appreciation of the Swiss franc, Swiss interest rates and inflation definitely are an important factor for those of us who expect to fund a Swiss retirement. Especially if you are trying to reduce volatility in the portfolio for a given average return.

ch is stable, smart/pragmatic, innovative, growing (migration) … not much to dislike.