Fixed income idea with a HY-bond yield and savings deposit risk
How to Lend Money to Swiss Bankers?
Investing in Switzerland is arguably the quintessential Old-Economy investing idea. It is not as exciting as investing in South America or arcane minerals. Nevertheless, it offers lucrative (and boring) opportunities for investors.
Switzerland means banking. Everyone knows about Swiss banking secrecy. In 1713, the Great Council of Geneva passed a law prohibiting banks from disclosing any confidential information to anyone except their account holders. In 1934, the Swiss Bank Secrecy Act came into effect, making it a criminal offense and carrying a potential penalty of up to 5 years of imprisonment for revealing client data without permission.
This is the March Beyond Equity report. Today, we headed to Switzerland, the center of private banking, in search of yield.
Why is Switzerland special?
Its neutrality and banking secrecy are legendary. The latter has undergone significant changes over the last 12 years. In 2013, Switzerland agreed to a data-sharing practice with the OECD, allowing it to share information with 60 countries. Despite that change, Swiss banking is here to stay for the foreseeable future.
Switzerland offers several widely unknown advantages, including mountainous terrain, a high percentage of military-trained men, and a high rate of gun ownership. Any state, organization, or individual has to think at least twice before making a move to invade Switzerland or simply plot to rob a Swiss bank.
And it's not only that. Switzerland is a hub for energy and commodity trading. The Greeks may own more than 20% of the global fleet (measured in tonnage), but the demand for their ships comes from picturesque villages in Swiss cantons. Consider Vitol, Glencore, and Trafigura and their influence on commodity and energy markets.
Last but not least, Switzerland belongs to the club of the 1%. The country ranks among the top three in terms of metrics, including GDP per capita, equality, and the number of millionaires.
To recap, Switzerland has an affluent, well-trained, and well-armed population, single-handedly controls the majority of energy and commodity flows, and features a rugged mountainous terrain. It seems the Swiss figured out the secret sauce of Private Banking, i.e., to keep global wealth pouring into Swiss vaults and accounts.
After that brief introduction, let’s proceed to Swiss private banking and Swiss corporate bonds. In the last chapter of today’s report, I will share Swiss’s fixed income idea.
History of Swiss private banking
Banking as we know it today has its origins in Italy. The advent of double-entry accounting, Arabic numerals, and early corporations has revolutionized global finance.
A nerdy note: Think about Lombard Street in London or Lombard Odier, one of the oldest Swiss private banks, and why they include 'Lombard' in their names.
So, the history of Swiss Banking could be divided into five periods:
Genesis of Swiss banking: The Lombards and Jews arrive in Switzerland in the 13 to 16th century
Maturing of Swiss Banking: Protestant Reformation 16th to 18th century
The birth of Private Banking: Early 19th century
Switzerland as a synonym of world banking: Globalization or Post-World War II period
Swiss Banking 2.0: Regulations, digitalization and entropy in the 21st century
Genesis of Swiss banking
Swiss banking began in the medieval period when Jewish and Lombard moneylenders facilitated trade by providing loans and currency exchange services. Switzerland's central location in Europe made it a hub for trade routes, enabling merchants to access financial services for cross-border transactions.
Cities like Geneva became centers for commerce, attracting financiers who supported trading activities. By the 15th century, Geneva’s trade fairs had become a crucial hub for fostering financial activities. These fairs attracted merchants from across Europe, creating demand for services such as currency exchange and credit provision. This marked the beginning of organized financial practices in Switzerland.
Maturing of Swiss Banking
The Protestant Reformation, led by John Calvin in Geneva, had a profound impact on Swiss banking. Calvinist theology relaxed restrictions on usury or charging interest on loans, which were previously prohibited under Catholic doctrine. This change allowed banks to expand their lending activities, laying the groundwork for modern banking practices.
Geneva became a refuge for Protestant exiles fleeing persecution in Catholic countries. Many of these refugees brought their wealth and financial expertise, further boosting Switzerland’s reputation as a haven for assets. This influx of capital and talent contributed to the development of private banking institutions.
The 18th century witnessed the establishment of Switzerland's first private banks, including Wegelin & Co. (1741) and Rahn & Bodmer (1750). These banks initially operated as family-owned businesses focused on managing the wealth of merchants and aristocrats. Their services included asset protection, investment advice, and international money transfers.
The Birth of Private Banking
Since the beginning of the 19th century, Switzerland has developed its competitive advantage as a leading banking hub. Neutrality and secrecy are Swiss advantages.
Switzerland's neutrality, formalized at the Congress of Vienna in 1815, attracted foreign capital during times of political instability across Europe. Wealthy individuals sought refuge for their assets in Swiss banks due to their discretion and stability. This influx of funds helped private banks grow and diversify their services.
The tradition of banking secrecy originated in Geneva with a 1713 law that prohibited bankers from disclosing client information. This principle became a cornerstone of Swiss private banking, attracting clients who sought confidentiality and discretion.
Banking secrecy was formally codified with the Federal Act on Banks and Savings Banks in 1934. This law made it illegal to disclose account holder information without consent, further enhancing Switzerland’s reputation as a haven for wealth during periods of turmoil.
Switzerland's neutrality during both World Wars reinforced its reputation. During these conflicts, vast sums of money, gold, and other assets were transferred to Swiss banks for safekeeping. The country's political stability further solidified its position as a world financial center.
Switzerland as a synonym of world banking
The second half of the 20th century saw significant consolidation within the private banking sector. Many smaller banks were acquired by larger institutions, such as UBS, or restructured into limited liability companies to address succession issues or fund growth.
Asset management in Switzerland evolved in tandem with private banking, but it became more distinct in the late 20th century. Initially focused on managing family wealth, the industry evolved into a sophisticated sector catering to institutional clients and offering a diverse range of investment products.
Swiss Banking 2.0
Since the beginning of the century, Swiss Banks entered a new period characterized by increased regulation and world polarization.
Regulatory pressures have challenged Switzerland's traditional banking secrecy. Scandals, such as UBS's tax evasion case in the 2000s, prompted reforms, including the adoption of the OECD’s Common Reporting Standard (CRS) for the automatic exchange of information.
Today, Switzerland manages over CHF 9 trillion in assets across its private banking sector. It remains one of the largest offshore wealth management centers globally, with approximately one-third of its services catering to international clients. Asset management alone contributes significantly to Switzerland's GDP and continues to grow at an impressive rate.
Swiss private banking Landscape
The big names in Swiss private banking and asset management include some of the most prominent financial institutions globally. The largest Swiss private banks, as measured by AUM, are:
Chart via ZHAW Wealth Management Blog.
UBS Group AG is the largest private bank in Switzerland and one of the largest globally, managing trillions in assets under management. It offers comprehensive wealth management services, including portfolio diversification, alternative investments, and family office solutions. UBS is a systemically important bank that has expanded significantly following its acquisition of Credit Suisse.
Pictet & Cie, a family-owned private bank based in Geneva, Pictet, specializes in wealth management, asset management, and sustainable investing. It has a strong reputation for discretion and long-term client relationships.
Julius Baer Group is a leading private bank specializing in wealth and asset management for high-net-worth individuals (HNWIs). Julius Baer has a strong global presence and is known for its personalized services.
Vontobel is a Zurich-based bank offering wealth management, asset management, and investment solutions. Vontobel is a family-controlled, publicly listed company that combines tradition with modern financial services.
Some of the prominent names are private companies, and a few of the top ten players are publicly traded enterprises. In summary, we mere mortals can invest along with the old money and become owners or lenders to Swiss private banks.
Today’s report is not about stock picking. The accent is on fixed-income instruments. So, let’s talk about the Swiss corporate bond market.
Swiss Banks Bonds
First, let’s start with the basics of interest rates, yield, and duration. The Swiss National Bank (SNB) recently cut its policy rate to 0.25%, reflecting low inflation (0.3%) and subdued economic growth.
This dovish monetary policy has lowered borrowing costs for issuers, making bonds an attractive financing option. Presently, yields on Swiss corporate bonds average around 1-2% for investment-grade issues, offering a premium over government bonds, which yield approximately 0.7% for 10-year maturities. Duration varies widely but tends to be concentrated in short to medium-term maturities, aligning with investor preferences for lower interest rate risk in an inverted yield curve environment.
In 2025, the Swiss corporate bond market is experiencing a record level of issuance, driven by refinancing needs and tighter lending conditions at banks. Companies raised CHF 65 billion in 2024, a 21% increase from the previous year. This trend is expected to continue into 2025, with analysts predicting even higher issuance volumes due to refinancing needs for maturing bonds. Between 2025 and 2027, CHF 100 billion worth of corporate bonds will mature, necessitating substantial refinancing efforts.
Swiss companies issue bonds not only in Swiss francs but also in the euro and the U.S. dollar. While CHF-denominated bonds accounted for 28% of corporate issuance in 2024 (down from a peak of 40% in 2022), most companies prefer to issue bonds in foreign currencies due to their broader investor bases and more competitive yields.
At first glance, given such low rates, we expect to find unattractive yields that are well below those of the US 10Y bonds. Depending on our goals, whether capital gains or regular yield, risk tolerance, and skills — we select our tools.
Let’s look at a recent article from Zurcher Kantonalbank about HY bonds’ potential:
Conclusion: Our expectations for 2025 at a glance
We believe that bonds should be in every portfolio at current yield levels. This is because current yields look attractive, and the correlation with equities has recently turned negative again.
Higher global interest rates offer plenty of room for interest rate compression, which should disproportionately benefit global bond portfolios hedged in CHF.
Spread levels are low. Nevertheless, a differentiated view is essential and we believe that a long-term strategic allocation to spread products could pay off.
Short-dated high-yield bond classes such as CoCos, corporate hybrids and high yield offer attractive current yields with lower interest rate risk, in our view. This should make them less sensitive if, contrary to our expectations, inflationary pressures rise. Nevertheless, they could return in line with equities.
For yield seekers, Swiss private banks have lucrative proposals. Where to look for ideas?
As mentioned, a handful of Swiss private banks are publicly traded. Therefore, as investors, we have a few alternatives. Let’s start with the equity performance. Swiss banking stock has performed well over the last few years.
Correspondingly, Swiss banking bonds also fared well. A short-lived blip was Credit Suisse's failure in March 2023. Take a look at the UBS Group Funding 2028 bonds’ monthly chart below.
Since then, Swiss corporate bonds have traded at or near their par value.
In summary, Swiss HY bonds are a perfect fit for income-oriented investors who value low-risk, attractive yield opportunities.