Investment opportunities in Switzerland's low interest rate environment
Switzerland is a "low-interest-rate island" in a global environment where key interest rates remain elevated. Although the Swiss National Bank (SNB) currently maintains a zero-interest-rate policy, the possibility of a return to negative interest rates cannot be ruled out. This limits investment opportunities, making it all the more important to identify the implications and adjust asset allocation accordingly.
Three key takeaways
- Switzerland as a low-interest-rate island: Compared to other countries, Switzerland remains a low-interest-rate island. This is primarily due to solid public finances and low inflation rates.
- Challenges for investors: While foreign currency bonds offer higher yields and diversification opportunities, they are associated with foreign exchange risks and high hedging costs.
- Investment opportunities in a low-interest-rate environment: Institutional investors can consider short-term money market funds, diversified bond funds, or multi-asset mandates to capitalise on return opportunities and mitigate risks.
In its monetary policy assessment on 25 September, the Swiss National Bank (SNB) decided to keep its key interest rate at 0%. Since June, the zero-interest-rate policy has regained prominence, with the recent rate hike proving to be short-lived. While the situation is not yet as severe as in 2015, when negative interest rates—previously deemed impossible—were introduced, financial markets are already pricing in the potential return of a negative interest rate period.
Switzerland as a low-interest-rate island
Unlike the TINA ("There Is No Alternative") era that lasted until 2022, today’s global environment is not characterised by uniformly low interest rates. For instance, the US Federal Reserve recently reduced its key interest rate by 0.25 percentage points, yet it remains relatively high at 4.25%. Similarly, the Bank of England’s rate stands at 4%, the European Central Bank (ECB) maintains a deposit rate of 2%, and even the Bank of Japan, which adhered to negative rates for years, now offers 0.5%.
Switzerland, however, remains a low-interest-rate island. Unlike in the past, the scarcity of investment opportunities is no longer a global phenomenon. Switzerland’s solid public finances, economic strength, and low inflation rates attract global investors seeking security, leading to a structural appreciation of the Swiss franc. The SNB counters this trend with lower interest rates.
The real yield on US Treasury bonds currently stands at 1.8% (compared to -1% in 2021), offering viable alternatives to equities in many countries. In Switzerland, the yield to maturity on a 10-year government bond is currently 0.2%, matching the inflation rate, leaving no real yield. What, then, are the attractive alternatives for investors?
Risky flirts with higher yields abroad
One obvious option is to invest abroad to benefit from significantly higher yield levels. Indeed, the yield on global bonds has risen sharply compared to CHF-denominated bonds over recent years, with foreign currency bonds currently offering a yield to maturity around 3% higher (chart no 1). Historically, this is a substantial difference.
However, there is a catch: foreign exchange risk. In the current geopolitical climate, characterised by significant currency fluctuations, this risk is particularly pronounced. For example, foreign currency bonds have posted losses exceeding 6% in CHF terms this year. While hedging foreign exchange risk is strategically prudent, the associated high costs erode the entire yield advantage.
Despite these challenges, foreign currency bonds still offer certain advantages:
Firstly, potential for falling interest rates: The likelihood of declining interest rates, and thus significant price gains, is much higher abroad than in Switzerland. Secondly, greater diversification: Foreign markets provide access to a broader range of corporate bonds across various sectors, countries, and credit ratings, making them a valuable tool for portfolio diversification.
Chart no 1: Equity premium in Switzerland, bond yields abroad
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Swiss equities and listed real estate funds
Investors with a higher risk tolerance can counter the low-interest-rate environment more effectively. For example, Swiss equities and listed real estate funds are worth considering as additions to a defensive portfolio.
While the equity risk premium for global stocks has dropped significantly to a 10-year low, Swiss equities continue to offer a notably higher risk premium. Dividend yields in Switzerland also remain clearly higher than in the US (2.3% vs. 1.2%). Similarly, the distribution yield of listed real estate funds, despite price increases and high premiums, remains significantly higher than the yield to maturity on CHF-denominated bonds (chart no. 2).
Chart 2: Attractive distribution yield of real estate funds
Implications for our investment strategy
In our annual process for determining the optimal strategic asset allocation, macroeconomic trends such as these play a critical role. At the end of last year, we anticipated further interest rate cuts by the SNB and adjusted to the low-interest-rate environment accordingly.
As part of our investment strategy, we reduced CHF-denominated bonds in favour of listed Swiss real estate and alternative investments such as catastrophe bonds and private equity. We also significantly reduced the foreign currency quota, particularly in USD. These adjustments have paid off so far, and we are maintaining this approach.
Given the above factors, a slightly higher home bias in equities and a lower allocation to bonds currently appear advantageous. In 2025, global and Swiss equities, as well as foreign currency bonds and CHF-denominated bonds (hedged against currency risk), have delivered roughly equal returns so far. However, performance differences are expected to increase over the coming quarters.
Investment Opportunities in a low-interest-rate environment for institutional investors
In the current low-interest-rate environment, institutional investors face the challenge of protecting their short-term liquid assets from value erosion while achieving attractive returns. Zürcher Kantonalbank (ZKB) offers three solutions through its asset management division, tailored to different risk profiles and investment horizons:
Swisscanto (CH) Money Market Fund Responsible Opportunities CHF: This fund is suitable for short-term investments, offering high security, daily liquidity, and a strong presence in the CHF market, creating additional opportunities.
Swisscanto (CH) Bond Fund Responsible Short Duration CHF: Targeted at investors with a medium-term investment horizon, this fund provides broad diversification across issuers, sectors, and rating classes, focusing on CHF-denominated bonds.
Multi-Asset Mandate: This option combines short-duration bonds, defensive dividend stocks, and Swiss real estate, making it ideal for medium- to long-term investment horizons.
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This document only serves advertising and information purposes, is for distribution in Switzerland only and is not directed at persons in whose nationality or place of residence prohibit access to such information under applicable law. Where not indicated otherwise, the information concerns the collective investment schemes under the law of Luxembourg managed by Swisscanto Asset Management International S.A. (hereinafter "Swisscanto Funds"). The products described are undertakings for collective investment in transferable securities (UCITS) within the meaning of EU Directive 2009/65/EC, which is governed by Luxembourg law and subject to the supervision of the Luxembourg supervisory authority (CSSF). This document does not constitute a solicitation or invitation to subscribe or make an offer to purchase any securities, nor does it form the basis of any contract or obligation of any kind. The sole binding basis for the acquisition of Swisscanto Funds are the respective legal documents (management regulations, sales prospectuses and key information documents (PRIIP KID), as well as financial reports), which can be obtained free of charge at https://products.swisscanto.com as well as at Swisscanto Fondsleitung AG, Bahnhofstrasse 9, CH-8001 Zurich (also acting as representative of the Luxembourg Swisscanto funds in Switzerland) or in all offices of Zürcher Kantonalbank. Paying Agent for the Luxembourg Swisscanto funds in Switzerland is Zürcher Kantonalbank, Bahnhofstrasse 9, CH-8001 Zurich. Information about the sustainability-relevant aspects in accordance with the Regulation (EU) 2019/2088 as well as Swisscanto's strategy for the promotion of sustainability and the pursuit of sustainability goals in the fund investment process are available on the same website. The sub-fund referred to in the document is subject to Article 9 of Regulation (EU) 2019/2088. The distribution of the fund may be suspended at any time. Investors will be informed about the deregistration in due time. The investment involves risks, in particular those of fluctuations in value and earnings. Investments in foreign currencies are subject to exchange rate fluctuations. Past performance is neither an indicator nor a guarantee of future success. The risks are described in the sales prospectus and in the PRIIP KID. The information contained in this document has been compiled with the greatest care. Despite professional procedures, the correctness, completeness and topicality of the information cannot be guaranteed. Any liability for investments based on this document will be rejected. The document does not release the recipient from his or her own judgment. In particular, the recipient is recommended to check the information for compatibility with his or her personal circumstances as well as for legal, tax and other consequences, if necessary, with the help of an advisor. The prospectus and PRIIP KID should be read before making any final investment decision. The products and services described in this document are not available to U.S. persons under the relevant regulations (in particular Regulation S under the U.S. Securities Act of 1933).
Data as at (where not stated otherwise): 11.2024
© Zürcher Kantonalbank. All rights reserved.
This document only serves advertising and information purposes and is not directed at persons in whose nationality or place of residence prohibit access to such information under applicable law. Where not indicated otherwise, the information concerns the collective investment schemes under the law of Luxembourg managed by Swisscanto Asset Management International S.A. (hereinafter "Swisscanto Funds"). The products described are undertakings for collective investment in transferable securities (UCITS) within the meaning of EU Directive 2009/65/EC, which is governed by Luxembourg law and subject to the supervision of the Luxembourg supervisory authority (CSSF).
This document does not constitute a solicitation or invitation to subscribe or make an offer to purchase any securities, nor does it form the basis of any contract or obligation of any kind. The sole binding basis for the acquisition of Swisscanto Funds are the respective published legal documents (management regulations, sales prospectuses and key information documents (PRIIP KID), as well as financial reports), which can be obtained free of charge at https://products.swisscanto.com/. Information about the sustainability-relevant aspects in accordance with the Regulation (EU) 2019/2088 as well as Swisscanto's strategy for the promotion of sustainability and the pursuit of sustainability goals in the fund investment process are available on the same website. The sub-fund referred to in the document is subject to Article 9 of Regulation (EU) 2019/2088.
The distribution of the fund may be suspended at any time. Investors will be informed about the deregistration in due time. The investment involves risks, in particular those of fluctuations in value and earnings. Investments in foreign currencies are subject to exchange rate fluctuations. Past performance is neither an indicator nor a guarantee of future success. The risks are described in the sales prospectus and in the PRIIP KID. The information contained in this document has been compiled with the greatest care. Despite professional procedures, the correctness, completeness and topicality of the information cannot be guaranteed. Any liability for investments based on this document will be rejected. The document does not release the recipient from his or her own judgment. In particular, the recipient is recommended to check the information for compatibility with his or her personal circumstances as well as for legal, tax and other consequences, if necessary, with the help of an advisor. The prospectus and PRIIP KID should be read before making any final investment decision.
An overview of investors' rights is available at https://www.swisscanto.com/int/en/legal/summary-of-investor-rights.html.
The products and services described in this document are not available to U.S. persons under the relevant regulations (in particular Regulation S under the U.S. Securities Act of 1933). Data as at (where not stated otherwise): 11.2024
© Zürcher Kantonalbank. All rights reserved.
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