Swiss bonds: assessing yields correctly

The fact that the Swiss National Bank (SNB) cut its policy rate to zero this summer does not mean that investing in Swiss bonds has lost its appeal. On the contrary, this asset class continues to provide attractive opportunities, particularly in the high-grade segment, as reflected in the yield of the Swiss Bond Index (SBI). This index covers government and corporate bonds in Swiss francs issued by both Swiss and foreign borrowers and traded on the SIX Swiss Exchange, with maturities of at least one year and a credit rating of BBB or higher.

Assessing the yield: nominal ≠ real

In nominal terms, the yield to maturity for the SBI at the end of August 2025 is above the average for the past 10 years and therefore remains attractive in historical terms. In a comparison of nominal yields on 10-year government bonds across different countries, the US and Germany currently offer higher yields. However, in real terms – i.e., after adjusting for inflation – a different picture emerges: Switzerland’s comparative yield shortfall narrows significantly. Also, Swiss yields are more stable and less prone to volatility.

A large interest rate differential and a steep yield curve

This yield constellation can be attributed both to the interest rate differential and the steepness of yield curves. It is not the first time that the yield differential between Switzerland and the US has been large, though the differential between Switzerland and Germany is currently unusually pronounced. At the same time, yield curves – which show bond yields for different maturities – are currently relatively steep, both in Switzerland and the US as well as in the eurozone. This results in so-called term premiums. The yield premiums of long-dated bonds over short-dated bonds are meant to compensate investors for the higher interest rate risk associated with longer holding periods. We believe that current term premiums in the US and the eurozone are at an appropriate level, if not too low. By contrast, we believe term premiums in Switzerland to be at an attractive level. The key to this assessment is borrower quality in the relevant countries.

Switzerland on a firm footing as a borrower

The current situation in the US is far from ideal. The US administration is grappling not only with fiscal challenges, but also with such a high level of public debt that the rating agency Moody’s recently stripped the country of its top credit rating. On top of this come political risks, stemming firstly from US President Donald Trump’s arbitrary import tariff policies toward the US’s global trading partners, and secondly from his attempts to intervene in the monetary policy decisions of the US Federal Reserve to lower interest rates in support of US economic growth, despite US inflation still running high.

In the eurozone, Germany’s new government has turned its back on fiscal discipline, while France’s massive public debt burden, even under a new prime minister, has not been contained. The latter has also prompted a downgrade of the country’s credit rating.

Switzerland presents a different picture: it continues to uphold fiscal discipline, maintain its debt brake, and keep inflation firmly – perhaps too firmly – under control. This political and economic stability is what gives Switzerland its status as a safe haven, where many investors happily seek shelter in challenging times such as these.

Factoring in currencies

To obtain a true view of the attractiveness of Swiss bonds, it is crucial to factor in currency hedging. With bonds in US dollars and euros, the cost of hedging eats up a large portion of the nominal yield. When these hedging costs are considered, however, Swiss bonds look even more attractive in real terms. This provides investors with liabilities in Swiss francs with a particularly stable basis for purchasing power.

Spreads are also relevant

The spread component also plays a key role in the SBI yield. The credit spread, also referred to as a risk premium, is the difference in yield compared to low-risk government bonds or compared to the interest rates on swaps with the same maturity. Over the past six years, the different rating classes included in the SBI (AAA to BBB) have shown quite consistent risk premiums overall. Sharp upward spikes only occurred with the outbreak of the Covid pandemic in early 2020 and with Russia’s invasion of Ukraine in February 2022. In the latter case, spreads in the BBB-rated segment – which at the time included Russian bonds – surged the most. This year, risk premiums rose briefly after President Trump’s announcement of new import duties for US trading partners on April 2 (which he dubbed “Liberation Day”). These premiums have now more than normalized. At present, we believe that rating segments BBB and A are somewhat overvalued, while segments AA and AAA offer attractive spreads and attractive added value for the risk taken.

Well placed globally

Though the current nominal yield on the SBI may appear low at first glance, in recent years, the index – after currency hedging – has easily outperformed European, global and even emerging market bond indices. This underlines how remarkably strong and relatively attractive the Swiss bond market looks, despite being a somewhat smaller market.

Seeing uncertainty as an advantage

There is currently a great deal of uncertainty in the global economy and geopolitics – ranging from the erratic US tariff that is disrupting world trade, to the unpredictable future path of central banks as they balance various economic factors, including currencies movements, and to the increasing shift in global power dynamics, with the rise of China. This has led to the pronounced volatility in financial markets. However, bigger price fluctuations can also create new investment opportunities. That is why it is important to manage bond portfolios actively, both to seize such opportunities rather than let them pass by, and to manage risks in a targeted manner.

Making the most of particular market characteristics

The Swiss bond market offers a number of opportunities for active management. Its low level of liquidity often causes pricing inefficiencies to arise, which passive approaches cannot make use of. In addition, there are structural features such as a high index turnover of up to 40 percent a year and market participants who, for regulatory or strategic reasons, do not always act in an economically rational way.

In our opinion, expertise and market access are crucial in a market like this. Only experienced managers with an in-depth understanding of bonds and with direct access to the primary and secondary markets can build up and dispose of attractive volumes in a targeted way. Especially in periods of heightened yield and spread volatility, a wide range of opportunities emerges that active managers like us can flexibly capture through a disciplined approach. This gives them potential, over the long term, to consistently outperform their benchmark indices and offer investors stable added value.

Conclusion

In our eyes, Swiss bonds remain an attractive asset class even though current yields may appear low at first glance. Their relatively favorable yields to maturity in historical terms, their stable real returns after currency hedging, and their solid borrower creditworthiness make them attractive – particularly in the high-grade rating segment, though not exclusively. Inefficiencies in this comparatively illiquid market present additional potential for active management.

Thanks to these factors, the SBI has been a compelling option internationally in recent years, and it continues to offer investors the opportunity for sustained added value – especially when investment specialists with experience in this field are able to leverage the particular features of this market. We are pleased to assist our clients interested in Swiss bonds in managing their investments.