Swiss franc investors go back to their roots
Foreign central bank action sparked arbitrage opportunities in Swiss francs to shrink in 2020, so investors took a more domestic approach. As foreign issuance dries up, so too do Swissie mandates for international desks. Frank Jackman reports.
The Swiss franc bond market has thrived amid the coronavirus. With Sfr47.8bn ($52.3m) printed by the end of October, it is on course for its best year since 2015, when Sfr49.3bn was sold over the same period, according to Dealogic.
“Amid the extreme volatility, we have seen an increased demand from investors for fixed income products,” says Benjamin Heck, head of Swiss franc syndicate at Credit Suisse.
However, despite this increased demand, the actions of foreign central banks made international paper more expensive.
“Central bank purchases artificially inflated demand, but this was not the case in Swiss francs — a tightening rally in spreads was not possible to the same extent as in euros,” says Andreas Tocchio, head of Swiss franc syndicate at UBS.
“It was at this point where the two market segments decoupled: it became too expensive for international issuers to come to the market.”
As a result, international issuers sold only Sfr12.3bn worth of deals throughout the first 10 months of the year — the lowest level in over 30 years, according to Dealogic.
“Once the situation calmed down and central banks helped to suppress spreads, the competitiveness in the Swiss market was lost,” says Tocchio.
Of course, any favourable move in the basis swap would help the Swiss franc market regain its competitiveness, Tocchio says. “In the past, like in 2015-17, we had low rates, tight spreads and international issuance.”
Heck says: “Once secondary spreads rally to a level appropriate for international issuers, the foreign market will restart.”
International issuance is already starting to show signs of restarting as Swiss spreads come in. “In late March, the level for a Korea National Oil Company five year was 140bp, for example,” says Tocchio, “but the last transaction they did was a seven year tap at plus 50bp in August — even for the Swiss market this is quite a tightening.”
He adds: “What matters [for Swiss investors] are the relative value considerations. If international paper is cheap, they’ll buy that, but if domestic is cheaper, they’ll buy that instead.”
While international issuance has waned, the domestic Swiss market, as this review goes to press, is on track for one of its busiest years on record. At the end of October, domestic issuance was at an all-time year to date high, with Sfr35.5bn worth of deals printed over the 10 month period.
“A risk-off environment means investors look closer to home: in times of crisis, you go back to your roots,” says Heck.
With investors unable to turn to international issuance in search of returns in 2020, they are looking for other ways to pick up yield.
“You either go further down the credit spectrum or further out along the maturity curve,” says Heck. “It is duration risk versus credit risk — which is better?”
One long-end highlight for Heck came in the autumn, when investors got the rare chance to load up on 50 year debt.
The City of Bern scooped Sfr100m at a coupon of 0.625% in September and Lugano raised Sfr140m at 0.15% a month later.
“The alternative to this is to buy corporate paper and get a yield pick-up but no duration,” says Heck.
As an example, he points to a pair of shorter deals for Zurich and Geneva airports that raised a combined Sfr600m in April despite the worsening Covid pandemic.
The two airports sold deals of four and three years in maturity respectively, with coupons of 0.7% and 1.05%.
However, this demand for corporate issuance in 2020 could lead to “missing supply on the domestic side in 2021, as many of these issuers are fully funded for the near future,” says Tocchio.
As international arbitrage opportunities dwindle heading into 2021, domestic Swiss banks are taking the lion’s share of mandates.
“The lack of international issuance is quite devastating, especially for our international competitors,” says Tocchio.
Trades by domestic banks dominated the market in 2020, with deals run by foreign bank desks accounting for only Sfr3.2bn apportioned of the Sfr47.8bn issued by the end of October — down from Sfr5.5bn apportioned at the same point last year.
“Everyone has a particular area where they’re strongest, be it geographically or by product, and the chance of getting a more diverse array of issuers in the Swissie market increases with the number of international banks present,” says Heck. “A Swiss market oligopoly wouldn’t be a positive for the market, and certainly wouldn’t help attractiveness.” GC