Why Swiss Investors Are Returning to US Treasuries

1. THE DEVELOPMENT

One of Switzerland’s major institutional investment managers has made a notable allocation change. Lombard Odier Investment Management has moved overweight US Treasuries for the first time in at least five years. Its multi asset strategies have shifted part of their cash exposure into ten year Treasury futures, producing a 2% overweight position. SWI swissinfo.ch

The move comes after a sharp repricing in sovereign bonds. Ten year US Treasury yields moved above 5% during the week, while thirty year yields reached 5.44%, their highest level since 2004. The decision is particularly striking from Switzerland, where the SNB kept its policy rate at 0% on 24 September. The resulting yield gap creates substantial income potential before currency risk is taken into account. SWI swissinfo.ch

2. THE PRIVATE WEALTH CONTEXT

For much of the post financial crisis period, government bonds offered limited income. Investors accepted equity risk, private market exposure and increasingly complex credit partly because safe government securities paid very little.

That calculation is changing. A government bond yielding approximately 5% competes directly with equities, property and private credit for capital. Investors must therefore ask whether the additional return expected from a riskier asset sufficiently compensates them for taking that additional risk.

This concept is known as relative value. It does not mean that government bonds are automatically superior to equities. It means that the return available from the lower risk asset has risen enough to alter the comparison.

The Swiss perspective makes the contrast particularly pronounced. Domestic cash and government yields remain low. An investor moving capital from Swiss francs into dollar bonds may therefore collect substantially higher income, known as carry. But the investor simultaneously assumes dollar exposure unless that currency risk is hedged, and hedging itself has a cost.

3. WHY THIS MATTERS FOR CAPITAL

A sustained 5% risk free yield changes valuations across the financial system. Private equity transactions require higher prospective returns, property cap rates face upward pressure, corporate borrowing becomes more expensive and equity valuations become harder to justify purely on future growth. At the same time, high grade bonds regain a strategic role in portfolios that had previously relied heavily on equities and alternatives for income.

4. WHAT WE ARE WATCHING NEXT

3 months: Whether ten year Treasury yields stabilise near current levels or continue rising as markets reassess US inflation and Federal Reserve policy.

6 months: Whether institutional investors increasingly shift cash and equity exposure toward fixed income.

12 months: Whether higher sovereign yields begin to place greater pressure on leveraged property, private equity and corporate credit valuations.

24 months: If yields remain structurally higher, asset allocation models developed during the ultra low rate era may require permanent revision.

5. HOW PROFESSIONAL CAPITAL IS RESPONDING

Lombard Odier’s position illustrates that institutional investors are beginning to see value even while many market participants remain worried about US deficits, inflation and government borrowing. Its macro team argues that bond yields now compete much more directly with the earnings yield available from equities. The firm nevertheless expects fewer Federal Reserve increases than markets currently price, showing how substantial disagreement remains around the path of rates. SWI swissinfo.ch

This is not yet a wholesale rejection of equities. It is a reassessment of how much investors should be paid for assuming each type of risk.

6. THE PRIVATE BANKING PERSPECTIVE

For private banking clients, higher government bond yields create both investment and financing implications. Bonds can again serve as meaningful income producing assets rather than simply portfolio stabilisers. They can also form part of the collateral base used for Lombard facilities, although eligibility and advance rates vary considerably between banks and instruments.

Currency remains central. A Swiss based client earning dollar income on Treasury holdings may gain attractive carry while simultaneously introducing USD exposure into the balance sheet. A private banker therefore considers yield, duration, currency and financing together rather than simply comparing headline interest rates.

7. IMPLICATIONS FOR INTERNATIONAL CLIENTS

For international families holding substantial liquidity, the relevant question is increasingly where cash should sit, in which currency and at which bank. Differences between Swiss, UK, euro and US interest rates can now materially affect returns on otherwise conservative capital. Multi banking and international treasury management may therefore have as much strategic importance as security selection.

8. THE PRIVATE OFFICE VIEW

The return of meaningful yields on high quality government debt is one of the most important changes in global wealth management. Capital no longer needs to travel far along the risk spectrum simply to earn income. For internationally diversified families and entrepreneurs, that makes disciplined comparison between cash, bonds, credit, currencies and borrowing costs significantly more valuable.