The only non-mechanical trade of 2025: switching my debt to CHF after the Dollar went under 0.79. An inverse carry trade.
At the moment the Dollar is at 0.7780.
Probably should have kept it in Dollar as I still can deduct the interest from tax. Anyways, long term the interest difference is more than the capital loss. And that is cash flow, every month.
I think about getting a USD credit card.
I have to check various offerings (e.g. CH/US issuer).
And what’s the thinking behind it? If your liquid assets (needed to pay of the credit card) are in CHF, it doesn’t make a difference, no?
Wise gives you an USD account since a few years again. Not a credit card but at least free.
My income is in USD, dividends and gains. So thanks to wise I can avoid some currency exchange. But I never rent cars, so I don’t need a credit card…
I need to margin out about 200k of debt. I’m wondering if I should take it out in USD or CHF.
CHF has low interest rates so maybe blended 1.25% or so. USD has high interest rates about 5%. Theoretically, interest rates should balance against FX movements, so holding USD should be favourable in that USD balance should decrease relative to CHF and you get a deduction on the USD interest.
On the other hand, paying a few hundred USD per month isn’t much fun either, esp if USD actually strengthens.
I guess having USD debt also is a partial currency hedge against USD heavy stock portfolio.
What currency do you hold your debt in and for what reasons?
I keep my debt in CHF – my work income is in CHF. I see that as the most predictable, and least risk.
Even it was my worst investment, I would do it again.
First check the actual interest difference for USD 200k:
USD 4.89%
CHF 1.289%
Both go down around 0.5% if your debt is higher. The actual difference is 3.6%. That much the Dollar may go down per year without you losing money. And the point is per year. If you plan to hold the debt for longterm you have to multiply the difference with the number of years.
Lucky we have the data since world war 1, so we can do that. The difference is a few hundred percent, while the loss per definition cannot be more than a hundred percent. The loss of the USD was more or less 85%.
So, everything depends. Wait for tomorrow, the interest rate is supposed to stay the same. If it goes down the dollar may lose a lot. The decision gets out around 20:00.
Addendum: I hold part of my CHF debt as mortgage, there you can get still lower interest. I don’t want all as mortgage because of the added flexibility. And, in my age I pay 0.75% for the mortgage and around 0.87% for the margin loan.
Several factors to consider:
Maybe to add more information:
Writing out the above, it seems to make sense to take debt in USD to offset/hedge USD income. Although it technically also offsets USD assets, since those assets are stocks, they should naturally adjust with FX differences to some degree.
Maybe in 2028 or so when the interest deduction is restricted, it would no longer be efficient to hold USD debt and so maybe it would make sense to adjust then.
I guess falling USD rates and falling USD could be a benefit of holding USD debt although perhaps this is already priced-in to some degree.
Is that because you bet that USD will not lose more than 3.6% p.a. on average for the next x years?
I do not plan to pay back anything, so my heirs will inherit the debt too. So yes, I bet the Dollar will lose less than the interest difference. It is the strongest military nation and the second strongest currency, while the strongest is the exotic CHF.
The non-constitutional new tax law will hurt a bit, but the carry premium minus tax and debt interest is still positive for the debt, so why change a working system?
Hmm. I guess if we look post-Plaza accords and start from 1991, if my calculations are correct, then USD lost on average 1.36% versus the CHF.
I do see accelerated drops after dotcom crash, GFC and a smaller one for covid crash.
I wish I had my debt in USD today!
I think we cannot look at nominal fx history to say much. I believe we need to look at Real Exchange rates too.
During zero rate and no inflation era there was no reason for CHF/USD to appreciate and hence for a decade the pair remained flat around 1.10. But post Covid US inflation had been significantly higher than Switzerland which obviously pushed the pendulum. In addition the derisking from USD due to lack of trust is pushing devaluation at margins.
I lost like 2% this month on my negative carry trade CHF/USD (having moved big part of my debt to CHF). That is hard, but then I had a performance of 12.6% in my momentum strategy ,the only place I use leverage at the moment.
That was one of the most extreme movements in the Dollar since a long time and still… peanuts compared with the movements of stocks.
BTW: in the 12.6% interest and capital loss of the CHF and tax on dividends is already included, it is the net performance of YTD 12.6%. One of the best months in a long time I think. OK, it is still 3 days and today is Fed day.
Sorry for my lack of understanding, but I fail to see your conclusion (if you have one). Do you think a debit in USD or CHF is better?
Long term I think the debt in the currency with lower interest is better. The interest difference long term is bigger than the capital loss of the higher interest currency.
Now, short term it may look like a disaster, like right now.
I would agree so long as dividends in USD are lower than any other CHF income; otherwise, I would not.
If you don’t want to speculate on currency movements, which I would strongly advise against, the best option is to hold debt in the currency in which you earn the most.