Which Swiss Govt Bond ?

Discussion in 'Financial Futures' started by J-Trade, Sep 18, 2010.

  1. J-Trade


    I have a longer-term account in which I want to switch the cash into bonds, specifically Swiss Govt bonds, ie. for security not yield (I'm told that in the case of the brokerage failing, cash would be lost but a bond belongs to the account holder - anyone know if this is true ?)

    Which bonds should be held for this purpose : 2, 5, 10 or 30 year, or does it not really make much difference ?

    I remember when I started trading in the US (I live in the euro zone), it was standard practice to hold a 30yr US bond, at least in a futures account.
  2. Firstly, what you were told about your bond holdings in a broker's account doesn't necessarily have to hold, as far as I am aware. All depends on the exact phrasing of your contract with the broker, as well as the agreement between the broker and the custodian (e.g. State Street or BONY).

    Secondly, be aware that liquidity in Confs (Swiss govt bonds) is not great, as there's not many of them arnd. If memory serves, there isn't actually a 30y Conf (I'll check Monday).

    Thirdly, the question of which maturity bond to own is the one you have to answer yourself. On the one hand, the longer the maturity, the more yield you get (not that you get a lot of yield on Confs). The flip side is that your duration (interest rate risk) is that much higher. Pick yer poison...
  3. J-Trade


    Thanks for the response. As far as I can see, there is a 30yr.

    I am already in the process of checking exactly how one would take possession of a bond in the event of broker default.

    I am surprised Swiss Govt bonds don't have much liquidity : I won't be holding more than 10 or so, so I'm thinking that quantity is very liquid. I don't fully understand what you mean by interest rate risk being higher with a 30 yr if there is no need to hold to maturity & if the purpose is solely to protect against broker default in the event of a major global metldown ?
  4. Sure, I would guess that for small size (normally, I think in terms of total notional, rather than number of bonds) liquidity is not that big of an issue. However, if I were you, I'd look at what a two-way mkt in Confs of various maturities is like. Just to make sure that you're aware of how much you're paying in bid/offer, in comparison to what you'd get if you traded, for example, USTs in the same size.

    Well, suppose you have bought CHF 1mil worth of Conf bonds at par. In the case of a global sh1tshow, you're right, your bonds will provide you a safe haven of sorts. In fact, yields are likely to fall, so you'll make money. However, what happens to your bonds if there's a global recovery? For one, given where things are, the SNB will probably be raising rates like there's no tomorrow. Your bonds won't be a happy investment in this case (they might go from par to 90, for example). The sensitivity to rates of your position will depend on the maturity of the bonds you hold.
  5. J-Trade


    Thank-you for your very helpful responses, Martinghoul.

    I need to think about the downside, but my present view is very pessimistic in the short to medium term for EUR, GBP and USD denominated economies. The piper is goinng to have to be paid... sooner or later... one way or another...
  6. Sure, no probs, j-t... I don't disagree with you in terms of what you propose as the central scenario. However, I wanted to make sure you were aware of the downside, as well as the upside.

    BTW, you're absolutely right in that there are actually 30y confs. In fact, there's even a 40y.
  7. J-Trade


    Thanks - I'll check it out.

    Edit : not sure a brokerage would acccept these as trading collateral & I'm unclear of what the effects might be in a serous meltdown vs. a govt bond ?