Switzerland’s stability has made it an attractive destination for both capital and people, though this allure often brings challenges. The recent downfall of Credit Suisse, while a significant reputational blow to the nation known for its banking prowess, has largely been contained within the banking sector. However, a more pervasive issue now looms associated with the strength of the Swiss franc, which is another cornerstone of the country’s stability.
Since the beginning of the year, the Swiss franc has surged more than 13% against the dollar and has reached its highest value against the euro in over two decades. This appreciation poses difficulties for Swiss exporters, raising concerns that the Swiss National Bank (SNB) is dissatisfied with the currency’s strength. Traditionally, the franc’s value has moved in concert with the price of gold, which recently surged to record highs. Both the franc and gold are considered safe-haven assets, further complicating the SNB’s position.
The SNB now faces an additional challenge with the rise of stablecoins—currencies often pegged to the dollar—which have started to exhibit connections to both the franc and gold. Should cryptocurrency enthusiasts begin to acquire francs, expecting a growing correlation with stablecoins or gold, the franc’s value may appreciate even further. This situation presents a conundrum for the SNB while simultaneously creating opportunities within the bond market.
The SNB has accrued significant foreign asset holdings due to prior interventions aimed at weakening the franc, though its capacity to make further market interventions is under scrutiny. Moreover, the Swiss government’s yield curve is negative for terms up to six years, reminiscent of the negative interest rate environment faced in Europe prior to 2022. The current shape of the curve suggests that cuts to policy rates below the existing 0% could become a reality.
In response to these developments, investors in Swiss francs are extending their search for yield along the maturity curve. Recently, the Canton of Geneva issued a 40-year bond at an interest rate below 1%. This thirst for yield is not exclusive to domestic entities; Austria has actively issued long-dated Swiss franc bonds throughout the year, maturing up to 20 years. Adding to this trend, the International Development Association recently launched a 12-year bond.
Investors’ quest for yield may also push them towards lower-rated assets. A notable example includes Hypo Vorarlberg’s issuance of a Sfr50 million additional tier one (AT1) capital note this week. While small in scale, this issuance marks a significant event as it is the first foreign AT1 since the collapse of Credit Suisse, reflecting local investors’ increasing willingness to engage with riskier assets—even those that raised alarms earlier this year.
As Switzerland navigates these complexities, it is clear that while challenges exist with the strength of its currency, they also pave the way for potential opportunities within the financial markets. The adaptability of Switzerland’s banking framework may enable it to turn these hurdles into avenues for growth, showcasing resilience in the face of evolving economic landscapes.