Good point, haven’t considered tax implications! Worried about the National Bank further raising rates though…
Also, if you have a somewhat international lifestyle living abroad for longer periods of time, does it make sense to only hold bonds in CHF? Wouldn’t a CHF/USD or EUR mix be preferable?
Nah. If you want a more or less determined yield in CHF, you would have to FX hedge at least the principal of the US bond up to the maturity date. It won’t work with bond funds, they typically hedge for one month, maybe 3, but certainly not more.
However, I wonder if someone wants to check the CHF yield (before and after taxes) on the following combination:
- Buy a US Treasury bond with the maturity in, say, 3 years. At IB, so fees are low.
- Buy a USDCHF FX swap on the amount of the bond’s principle until the maturity.
I don’t know practical details of using FX swaps and I am not very interested, so I won’t do this myself.
Another aspect to consider is: which government are you willing to finance?
Maybe I’m totally confused, but the tax declaration changes USD interest to CHF at the end of year, so could you theoretically win twice here ?
Global investment grade corporate and potentially government bonds (with low government exposure to the US and EM) hedged in CHF or Swiss government bonds.
I trust democratic governments to protect their citizens as investors in case of default because the opposite wouldn’t get them reelected. I don’t trust them to offer the same level of protection to foreign investors. The US Government is one of those I trust the least: the IRS is predatory (they’re one of the few countries who tax their citizens when they live abroad, for example) and their current breed of politicians are very anchored in their partisan views, to the point of making defaulting on their bonds a talking point.
A huge diversification through issuers gives me a better sense of security than a concentration in a single foreign government. The risk I am trying to mitigate, here, being a risk of default (I doubt all corporations would default all at once). The bonds may all loose value at the same time and the duration of the bond fund should match the time horizon of the investment (if not available, I would choose shorter and expose myself to interest risk rather than longer and risk loosing capital to market fluctuations).
Here are a couple of interesting reads with this regards (ST vs LT Bonds)
On one hand, short term bonds don’t have duration risk.
On the other, they only lock yield for so long and don’t protect in a deflation scenario.
US interest tax is 0% according to the document “Double taxation agreements: overview” on the Double taxation agreements page on admin.ch. There is a caveat though:
BND probably holds some products like that. Which leads to a non-zero withholding tax.
What is also interesting is that holding long-term treasuries in IDLT (IE00BSKRJZ44) doesn’t expend any taxes according to the annual reports. In fact none of the bond funds (including Eurozone bonds) in that report do, whilst equity funds do.
At least for the US bonds I found some probable explanation: Portfolio Debt(/Interest) Exemption as explained by those IRS slides makes 0% US tax possible for any foreign lender under certain circumstances.