Investment strategy: Allocation of the fixed-income quota

This flash focuses on the allocation of the fixed-income quota between the two asset classes included in the Economico standard portfolios: money market CHF and bonds CHF.

The return of these two asset classes results from the average interest rate of the fixed-income securities included in the asset classes, plus or minus price changes caused by shifts in the yield curve.

The average interest rate is measured by the so-called yield to maturity. As of 31.12.2024, the average yield to maturity of the CHF bonds asset class was 0.65%. Price changes due to interest rate movements are directly proportional to the average maturity (duration) of the securities, and the potential change in value or risk of value change of a fixed-income security can be approximated using the formula interest rate change * duration. A parallel upward shift of the yield curve by 1% would lead to an immediate loss of 7.2% with the current duration of 7.2. CHF bonds – even those with high credit quality such as Swiss Confederation bonds – therefore carry substantial price risk: when interest rates rise, bond prices fall and vice versa. A negative (positive) price change is always accompanied by a positive (negative) interest effect. Over the average remaining maturity, these two effects tend to offset each other.

When comparing money market CHF with bonds CHF, the first point of interest is the comparison of the average interest rate or yield to maturity: since longer maturities are generally compensated with higher interest rates (=> upward sloping yield curve), CHF bonds are typically preferable to money market CHF from a profitability perspective. According to the chart of the week, this is currently also the case: 10-year Swiss Confederation bonds yield 0.32%, which is 0.23% higher than 1-year Swiss Confederation bonds with a yield of 0.09%. Modest, but still better than nothing.

If the yield curve is flat or even inverted for a longer period (=> inverse yield curve), it may be reasonable to replace CHF bonds with money market investments. However, when using money market investments it is important to ensure that market-level interest rates are actually achieved, which is often not the case for current account balances parked with a house bank.

When allocating the fixed-income quota of Economico standard portfolios, preference is generally given to the CHF bonds asset class over the CHF money market due to the typically rising yield curve. However, if the yield curve remains flat or inverted for a prolonged period, deviating from this principle can make sense.