A better 'airbag' makes CHF bonds attractive

The first half of 2022 showed that even safe CHF bonds are not immune from painful losses. After many years of excellent performance, the portfolio with all Swiss bonds, for example, did about as poorly as Swiss equities.¹

Safe bonds are normally expected to have a stabilising effect when stock markets fall, but here the exact opposite occurred. In our latest paper, we examine the components that determine the level of losses from risk-free bonds in different interest rate scenarios.  

• The loss potential of risk-free bonds depends on the duration and the size of the assumed interest rate increase, as well as on the given rate level, especially for longer periods. That initial level can act like an airbag, cushioning losses
• Figurately speaking, the greater the interest rate risk, the greater the burden on the available airbag. However, the length of the investment horizon is even more decisive for the expected future return
• A slightly longer investment horizon, not too much interest rate risk and additional credit risk can help to significantly improve the return prospects of CHF bonds over the next 5 years

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