Switzerland’s stability has made it a much-desired destination for capital, as well as people. This is often a headache.
Though Credit Suisse’s demise was a reputational hit for a country that has thrived on banking, this has been, so far, contained within the banking sector.
But the country of 9m people has been facing a far wider problem from another anchor of its stability — the currency.
As has happened before, the strength of the Swiss franc has become a burden for Swiss exporters and market observations suggest that the Swiss National Bank is not a fan of its appreciation.
Since the start of the year, the franc has gained more than 13% against the dollar, and it is at its highest value in euros for more than 20 years.
Part of the problem is gold’s recent meteoric surge to record highs. The Swiss franc tends to be correlated with the gold price, as both are considered safe haven assets.
On top of that, the SNB now has a new problem.
Stablecoins, most often tied to the dollar, have also been linked to the franc and gold.
Should crypto-currency funds or aficionados start buying francs on the premise of a growing link, to either stablecoins or gold, its value will further appreciate.
This will be a nuisance for the SNB but has already turned into an opportunity for bond issuers.
The SNB has already amassed huge holdings of foreign assets from its previous attempts to weaken the franc. Whether it can intervene any further in currency markets is questionable.
Meanwhile, the Swiss government yield curve is already negative to around six years, recalling the years of Europe’s negative interest rates before 2022.
The shape of the curve suggests policy rate cuts below the current 0% are a distinct possibility.
Meanwhile, franc investors are moving out on the maturity curve, hunting for some semblance of yield.
This week the Canton of Geneva stretched to a 40 year deal, and paid less than 1%.
The opportunities are not limited to domestic borrowers. Austria has been printing long dated Swissie bonds regularly this year, out to 20 years.
The International Development Association cashed in with a 12 year on Thursday.
The quest for yield may also drive investors further down the rating spectrum and capital structure.
Hypo Vorarlberg’s appearance with a Sfr50m additional tier one capital note this week was a case in point.
Despite its small size, this deal from a lower tier Austrian bank was symbolic.
The first foreign AT1 since the collapse of Credit Suisse shows local investors' growing receptiveness to riskier assets —even an instrument that alarmed the country in March 2023.