Swiss franc bonds are making a comeback for emerging-market issuers taking advantage of the cheapest yields in Europe.
Since Poland ended a five-month freeze on sales by emerging markets in the Swiss currency three weeks ago, issuers from Chile to China are turning to franc debt amid a global bond rout that’s driven up borrowing costs. The pipeline has room to grow as investors in Switzerland seek places to park their cash and borrowers take advantage of yields that are less than a 10th of German bunds.
“The Swiss franc market is desperate for foreign issuers as there is a real drought,” Stefan Eichenberger, who manages 2.5 billion francs ($2.7 billion) in assets at Swisscanto Asset Management in Zurich, said by e-mail on May 19. Issuers may use this opportunity, “otherwise they might have had to pay up in terms of spread, especially if they are a first time issuer,” he said.
As a testament to pent-up demand for Swiss debt, Poland almost tripled the size of its three-year offering to 580 million francs on April 28 at a yield of minus 0.21 percent, meaning investors were prepared to take losses in principal to hold the notes to maturity. The appeal of the bonds has since diminished, with yields on 10-year Swiss securities climbing to 0.04 percent from minus 0.08 percent three weeks ago. Still, equivalent German bunds yield 0.65 percent.
Sinochem Group, China’s state-owned oil company, raised 250 million francs, more than the 150 million francs targeted on Wednesday, according to a person familiar with the plan, who asked not to be identified because the details are private. The debut offering due June 2022 was priced at 0.76 percent, the person said.
So far this year, emerging-market issuers have raised 1.08 billion francs of Swiss debt, a third of the amount in the same period last year, according to data compiled by Bloomberg. Banco Santander SA’s Chilean unit, Abu Dhabi’s First Gulf Bank PJSC and Banco de Credito e Inversiones sold bonds in francs in the past month with a coupon of 0.625 percent or less, the data show.
The Swiss debt market “offers competitive pricing compared to dollar or euro benchmark funding,” Christopher Wilmot, head of the treasury and global markets group at the First Gulf Bank, said by e-mail on Thursday, adding the bank expects to be a regular issuer in the Swiss market. “The recent Swiss issuance allowed FGB to access pools of investor liquidity not available through other markets.”
The Swiss National Bank scrapped its ceiling on the exchange rate on Jan. 15, sending the franc up more than 19 percent that day against its 16 major counterparts. Since then, the Swiss currency has pared those gains, leaving it 6.8 percent higher against the dollar for the year. That’s still the best performance among peers.
“Given the sharp strengthening of the Swiss franc following the removal of the floor under the franc in January, the likelihood of a surprise appreciation of the franc is small,” Per Hammarlund, the chief emerging-markets strategist at SEB AB in Stockholm, said by e-mail May 18. Switzerland “looks like the cheapest source of funding around,” he said.