Evaluating the "best" bonds in Switzerland: how to proceed

Bonds are essential to a balanced portfolio. However, their returns vary depending on interest rates and market conditions, making careful assessment particularly important. So, which bonds are most suitable for your needs? What defines the ‘best’ bonds? The answer depends entirely on what you’re looking for—maximum security, attractive returns, or an optimal blend of both.

In this article, you’ll learn how to navigate the Swiss bond market with confidence, which timeless evaluation criteria matter most, and which methods will help you independently assess which bonds best suit your individual investment goals.

What exactly is a bond and how does it work?

A bond (also called a fixed-income security or debt instrument) is comparable to a loan: you lend money to a government, a bank or a company. In return, you receive regular interest payments, and at the end of the agreed term, you get your initial investment back. That’s the basic idea in a nutshell.

Bonds are traded on the stock exchange, which means their value (or price) can fluctuate. One key thing to remember: there’s an inverse relationship between a bond’s price and its yield. When the price goes up, the yield falls, and when the price drops, the yield increases.

Key terms at a glance:

• Nominal Value (Par Value): This is the amount you’ll receive back at the end of the bond’s term. Bonds are usually issued in units of 1’000 CHF. If the bond is priced at 100%, you pay 1’000 CHF. If it’s trading at 102%, you’d currently pay 1’020 CHF.

• Coupon (interest rate): The coupon is the interest you receive regularly – typically annually or semi-annually. For example, if the coupon is 2% and the par value is 5’000 CHF, you’ll receive 100 CHF in interest each year.

• Yield: Yield shows the actual return you earn and is influenced by the current bond price. If the price is below 100%, your yield is higher than the stated coupon. If the price is above 100%, your yield is lower. Particularly relevant is the "Yield to Maturity," which accounts for all payments (interest and capital repayment) until the maturity date.

What types of bonds are there?

The investment world offers various types of bonds that differ in terms of interest rates and structure. Here is an overview of the main types:

• Fixed-rate bonds: You receive the same fixed interest rate every year. This interest rate remains unchanged throughout the entire term.

• Variable-rate bonds ("Floaters"): The interest rate of these bonds adjusts regularly. It is often linked to a reference rate, such as the SARON. This ensures that your return remains attractive even in fluctuating market conditions.

• Zero-coupon bonds: These bonds do not pay regular interest. Instead, you buy them at a discount (e.g., 950 CHF) and receive the full face value (e.g., 1000 CHF) at maturity. The difference represents your yield.

• Special types: These include convertible bonds ("Convertible Bonds"), which can later be exchanged for shares, or mortgage-backed bonds. These special types of bonds often serve specific purposes and offer additional opportunities, but also come with specific risks.

With this basic knowledge, you are now well-equipped to understand how bonds work. In the next section, we will take a closer look at the Swiss bond market: What issuers and types of bonds are typical in Switzerland, and what trends are currently shaping the market?

Overview of the Swiss bond market

Switzerland has a highly developed bond market, characterized by government, corporate, and financial issuers. When comparing Swiss bonds, you will often encounter various issuers and credit ratings:

Government bonds (Swiss Confederation)

The Swiss Confederation regularly issues federal bonds, which are considered the least risky CHF investments. These bonds finance the federal budget and have maturities ranging from a few months (money market claims) to 10 or even 30 years. Their interest rate is usually lower than that of corporate bonds because the Swiss government is highly creditworthy.

In the past, yields on ten-year Swiss government bonds occasionally went negative. However, they are positive again today, reflecting changes in interest rate conditions in Switzerland. Government bonds offer high security and are suitable as stable investments, although the yield potential is naturally limited.

Cantonal and municipal bonds

Cantons and large cities also issue their own bonds. Creditworthiness is high but varies depending on the issuer's financial strength. Some cantonal bonds are implicitly backed by the respective canton, reducing the default risk. This segment often offers slightly higher coupons than federal bonds, but the risk remains very manageable.

Corporate bonds

Large Swiss corporations such as Nestlé, Novartis, or Roche, as well as financial institutions, regularly issue bonds in the capital markets. These corporate bonds offer higher interest rates than government bonds to compensate for the slightly higher default risk. Their maturities typically range from 3 to 10 years, but they can also be much longer.

When looking at corporate bonds, it’s important to pay attention to creditworthiness. Many top Swiss companies have investment-grade ratings, while smaller companies may not be rated and are considered riskier. It’s worth comparing different offers, especially by industry, maturity, and rating.

Foreign companies also issue CHF bonds in Switzerland, known as "foreign CHF bonds," expanding your options.

Bank and cash bonds

Swiss banks also raise capital through bonds. Cash bonds are a Swiss specialty: they are issued directly by banks (often cantonal or large banks) to individual investors. These bonds have fixed maturities (typically 2 to 10 years) and offer fixed interest rates, usually slightly higher than savings account rates.

Unlike traditional bonds, cash bonds are not traded on the stock exchange but are held by the issuing bank until maturity. They are considered very secure, as Swiss banks are subject to strict regulations. However, as an investor, you bear the credit risk of the bank.

In addition to cash bonds, banks also issue similar bond-like products, such as mortgage-backed bonds or subordinated debt. These offer higher interest rates, but in case of liquidation, they are repaid last (e.g., Additional Tier 1 bonds).

Methods for your own bond analysis

To determine which bonds best suit your needs and the overall strategy of your investment portfolio, various helpful methods and criteria are available. At its core, it's about properly assessing the balance between risk and return.

1. Creditworthiness: How reliable is the issuer?

The key question is: How reliably will the issuer pay the interest on time and repay the full amount at maturity? This is where credit ratings come in. Rating agencies such as Moody’s or Standard & Poor’s assess the payment ability of states and companies with grades ranging from "AAA" (highest safety) to "D" (default). The better the rating, the lower the default risk, but also the lower the interest rate. Bonds with weaker ratings offer higher returns but come with higher risks.

2. Maturity and Interest: Short or long?

The maturity determines how long your capital is tied up and how sensitive the price is to interest rate changes. Short-term maturities (around 1 to 3 years) generally offer lower interest rates but are less sensitive to interest rate fluctuations. Long-term maturities (10 years and more) often offer higher interest rates but are more responsive to market changes.

3. Yield comparison: How high is the return?

Compare the yields of different bonds to assess whether they are attractively priced. Pay particular attention to the yield spread. This is the difference between the yield of a bond and a safe government bond with the same maturity. A higher spread signals that the market assigns a higher risk to this bond.

4. Keep an eye on price development

Observe the price development of the bonds. Stable or rising prices can indicate the market's confidence in the issuer. Conversely, falling prices may signal increased risks.

Conclusion: The "best" bonds for your individual needs

The question of the "best bonds" cannot be answered universally. The optimal choice always depends on your personal investment goals and risk profile. Use the evaluation criteria presented and carefully examine the opportunities and risks. An informed decision can make a crucial difference, which is why professional assistance may be worthwhile. Would you like to optimise your bond strategy individually? Contact our Wealth Management team and benefit from personalised advice.