Understanding Swiss real interest rates in a financially globalized world

Abstract

This paper proposes long-run estimates of ex ante real interest rates in Switzerland and other developed economies, and it describes their relative evolution. Our results highlight the decline in—and convergence of—global real interest rates that has unfolded over the last three decades for all maturities. While Swiss yields stand out as being particularly low and stable from a historical perspective, we find that Swiss interest rates have fallen less than in many other countries during the last decade. We then examine whether the reduction in the interest differential is related to a lower attractiveness of the Swiss franc. Focusing on the difference of Swiss minus German real government bonds yields, we find a significant increase in expected real depreciation of the Swiss franc and a somewhat lower convenience yield for Swiss bonds—the convenience yield reflecting the non-pecuniary value that investors impute to the liquidity of a given bond. In contrast, the safety premium in favor of the Swiss franc increased and therefore cannot explain the smaller decline in real interest rates in Switzerland. The last part of the paper analyzes the negative convenience yield on Swiss government bonds and its recent decline. We show that both the purchase of government bonds by foreign central banks and foreign exchange interventions by the Swiss National Bank may have contributed to this decline by reducing the relative supply of foreign versus domestic government bonds.

The Duration of the Impact of the “Investor Fear Index” on the Russian Stock Market

“…В связи с тем, что в периоды сильного спада в мировой экономике инвесторы распродают рисковые активы, появляется необходимость в защитных инструментах. Десятилетние швейцарские государственные облигации считаются безопасными активами, поэтому повышение «индекса страха инвесторов» приводит к росту спроса на них, а также к увеличению их доходности, однако такая связь не является устойчивой [12]. Риск волатильности, измеряемый CBOE Volatility Index, заложен в доходности корпоративных облигаций США [13].…”

Fundamental sources of risk and the decline of carry trade returns

“…In contrast, nominal short-term interest rates would be primarily influenced by the US policy rate. Similarly, Bacchetta et al (2022) also provide evidence of the decline and convergence of real interest rates. They perform a principal component analysis on a 30-year rolling window of data on real interest rates from 17 countries.…”

“…RIP depends on the extent to which UIP, PPP, and the Fisher's relation hold in domestic and foreign countries. Thus, it can also be viewed as a broader indicator of the convergence of inflation and nominal interest rates ( (Holmes, 2002;Bacchetta et al, 2022)). Miranda-Agrippino and Rey (2021) argue that the emergence of a "global financial cycle factor" may contribute to enhancing this convergence.…”

“…The authors also provide evidence that monetary policy shocks originating from the FED, ECB, and the People's Bank of China play a pivotal role in explaining fluctuations in international trade, economic output, and commodity prices. Similarly, Bacchetta et al (2022) apply principal component analysis on a dataset of real interest rates across 17 countries. heir findings indicate that the share of data variance explained by the first principal component, referred to as the "global factor", increased from 50% in the period 1960-1990 to 80% in the period 1990-2020. UIP Hypothesis.…”