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Trading and Capital-Markets Activities Manual

Instrument Profiles: Swiss Government Notes and Bonds
Source: Federal Reserve System 
(The complete Activities Manual (pdf format) can be downloaded from the Federal Reserve's web site)


Swiss government notes (SGNs) and bonds (SGBs), also known as confederation notes and bonds, are fully guaranteed debt obligations of the Swiss government. The Swiss government debt market has historically been relatively small as a result of the country's low level of debt and its balanced-budget policy. The Swiss government does not engage in open market operations because of the high degree of liquidity in the banking system. However, budget deficits in recent years have resulted in an increase in the volume of activity. Bonds and notes are issued through the Swiss National Bank in bearer form only. 


Bonds have average maturity ranges of seven to 20 years and are issued in denominations of Swiss franc (SFr) 1,000, SFr 5,000, and SFr 100,000. Notes have average maturities of three to seven years and are issued in denominations of SFr 50,000 and SFr 100,000. Both bonds and notes are fixed-coupon securities redeemable at par (bullets). Interest is paid annually and there are no odd first coupons. Most issues are callable, but many recent issues do not have a call feature. Settlement is based on Euroclear (an international clearing organization) conventions, three days after the trade date (T+3). Interest is calculated using the 30E+/360 day-count convention. If a starting date is the 31st, it is changed to the 30th, and an end date that falls on the 31st is changed to the 1st. 


Swiss government bonds and notes are used for investment, hedging, and speculative purposes. Foreign investors, including U.S. banks, often purchase Swiss government securities as a means of diversifying their securities portfolios. The low credit risk and liquidity of Swiss government bonds encourage their use. Swiss government securities may also be used to hedge an investor's exposure to Swiss interest rates or currency risk that is related to its positions in Swiss francs. Speculators may use Swiss government bonds to take positions on changes in the level and term structure of Swiss interest rates or on changes in the foreign-exchange rates between Switzerland and the United States. 


Issuing Practices 

The Swiss Treasury issues debt through a Dutch auction, and allocations are made to the highest bidders in descending order until the supply of securities the Treasury wishes to sell is depleted. The lowest accepted tender price is considered the clearing price. The debt-issuance calendar is announced at the beginning of each year. Currently, issuance takes place on the fourth Thursday of every second month. 

Secondary Market 

SGBs are listed on the Swiss stock exchanges in Zurich, Geneva, and Basel, as well as on the over-the-counter (OTC) market. SGNs are traded over the counter only. 

Market Participants 

Sell Side The main dealers of SGBs are the Union Bank of Switzerland, Credit Suisse, and the Swiss Bank Corporation. The Swiss National Bank does not allow non-Swiss banks to underwrite or manage issues. 

Buy Side 

Many investors, foreign and domestic, are attracted to the Swiss bond market because of the strength of the Swiss economy, the country's low inflation rates, and the stability of its political environment and currency, all of which contribute to a stable and low-risk government bond market. Investors include banks, securities firms, insurance companies, and money managers. 

Market Transparency 

The market of SGBs and SGNs is fairly active. Price transparency is relatively high for Swiss government securities since several information vendors, including Reuters and Telerate, disseminate prices to the investing public. 


Notes and bonds are quoted as a percentage of par to two decimals. For example, a quote of 98.16 would mean a price that is 98.16 percent of par value. The price quoted does not include accrued interest. Notes and bonds do not trade ex-dividend. 


Interest-rate risk may be hedged by taking contra positions in other government securities or by using interest-rate swaps, forwards, options, or futures. Foreign-exchange risk can be hedged by using currency swaps, forwards, futures, or options. 


Liquidity Risk 

The market for SGBs is more liquid than SGNs due to a lower number of SGN issues. Bonds typically trade in a liquid market for the first few months after they are issued. However, after a few months on the secondary market, liquidity tends to decrease as a result of the fact that issue size is relatively small. In addition, liquidity is hampered by buy-and-hold investment practices and by federal and cantonal taxes levied on secondary transactions. 

Interest-Rate Risk 

SGBs and SGNs are subject to interest-rate risk as a result of the inverse relationship between bond prices and interest rates. Longer-term issues have more price volatility than short-term instruments. However, the Swiss capital market is characterized by relatively low and stable interest rates. 

Foreign-Exchange Risk 

Currency fluctuations may affect the bond's yield as well as the value of coupons and principal paid in U.S. dollars. The Swiss franc is one of the strongest currencies in the world as a result of the strength of the Swiss economy and the excess liquidity in the banking system. Volatility of Swiss foreign-exchange rates has historically been low. 

Political Risk 

A change in the political environment, withholding tax laws, or market regulations can have an adverse impact on the value and liquidity of an investment in foreign bonds. Investors should be familiar with the local laws and regulations governing foreign bond issuance, trading, transactions, and authorized counterparties. 


The accounting treatment for investments in foreign debt is determined by the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 115, ''Accounting for Certain Investments in Debt and Equity Securities,'' as amended by SFAS 125, ''Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.'' SFAS 125 has been replaced by SFAS 140, which has the same title. Accounting treatment for derivatives used as investments or for hedging purposes is determined by SFAS 133, ''Accounting for Derivatives and Hedging Activities.'' (See section 2120.1, ''Accounting,'' for further discussion.) 


Swiss government notes and bonds are assigned to the 0 percent risk-weight category.


Swiss government notes and bonds are type III securities. As such, a bank's investment in them is limited to 10 percent of its equity capital and reserves. 


 Crossan, Ruth, and Mark Johnson, ed. The Guide to International Capital Markets 1991. London: Euromoney Publications PLC, 1991. 
 Fabozzi, Frank J., and Franco Modigliani. Capital Markets: Institutions and Instruments. Englewood Cliffs, N.J,: Prentice-Hall, 1992. 
 Kemp, L.J. A Guide to World Money and Capital Markets. New York: McGraw Hill, 1981. 
 J.P. Morgan Securities. Government Bond Outlines. 9th ed. Swiss Government Notes and Bonds 4245.1


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