Money market: Why we are focusing on Swiss franc bonds

For the past four years, money market funds have been a focal point for the investment community. The global rise in interest rates, which began at the end of 2021, abruptly ended their years of obscurity. Since then, high interest rates for investments in Swiss francs (CHF), combined with strongly inverted yield curves, have generated significant interest among both private and institutional investors. Additionally, the extra yield from money market funds compared to traditional account solutions has rarely been so enticing.

However, short-term interest rates worldwide are now below recent highs, with the Swiss National Bank's (SNB) key interest rate currently at just 0.5%. This is the ideal time to reassess the potential of money market funds: Dominik Neukom, portfolio manager and money market fund specialist at the Asset Management of Zürcher Kantonalbank, analyzes recent developments in money market funds in this interview. He also provides an outlook on why this asset class remains attractive for liquidity management in 2025.

Dominik, first a look back: how has the global rise in interest rates since the end of 2021 affected investment volumes in money market funds?

Investor interest was enormous. Globally managed assets in money market funds increased significantly due to high short-term interest rates. Our money market solutions also benefited. In our two CHF money market solutions alone, the "Swisscanto (CH) Money Market Fund Responsible Opportunities CHF"¹  and the "Swisscanto (LU) Money Market Fund Responsible CHF"² , we quadrupled the volume since the end of 2021 to around CHF 2.2 billion by the end of December 2024.

Interest rates in Switzerland have significantly declined over the past year. What are the consequences for investors in money market funds now?

Short-term interest rates have also fallen outside of the Swiss franc. However, Swiss interest rates are already very close to the zero boundary and significantly lower than in other currencies. For example, in the USD money market, current yields are around 5%. However, when factoring in the hedging costs of currency risk, the yield is roughly equivalent to that of the CHF money market.

Are money market funds still interesting in this context?

That's a valid question. Despite the SNB's key interest rate currently standing at 0.5% and the market expecting further reductions to 0%, money market funds remain interesting for several reasons.

Why is that?

Firstly, money market funds continue to offer a significant yield premium over traditional account solutions. While competitive interest rates are often only paid on smaller volumes, such as up to CHF 100,000, larger liquidity blocks can be efficiently placed in money market funds. This makes the funds particularly interesting for clients with higher liquidity quotas. Secondly, for example, our money market funds have a duration of around 0.4 years...

...how can that be advantageous?

Investors could benefit from a price effect if there is an unexpected drop into negative interest rates. Additionally, the daily liquidity, broad diversification, and high credit quality, which distinguish our money market funds from fixed deposits, are positive aspects. Since our money market funds primarily invest in short-term bonds, the funds are also subject to smaller price fluctuations compared to fixed deposits.

In the "Swisscanto (CH) Money Market Responsible Opportunities Fund", currency-hedged investments within the G10 currencies are permitted. Nevertheless, the fund currently invests almost exclusively in CHF bonds. Why is that?

That's correct. Investments outside the CHF are currently not sufficiently attractive after considering hedging costs. But there are other reasons as well.

What are those reasons?

High coupon yields, such as in the USD market, significantly increase the taxable income for Swiss investors without allowing the substantial hedging costs to be deducted for tax purposes (see graph below). In the CHF market, we have a large selection of instruments with very low coupons and attractive yields, thanks to the negative interest rate period from 2014 to 2022. Most of the overall performance thus comes from capital gains. Considering all this, it becomes clear why we currently prefer CHF bonds.

Foreign currencies money market – the devil is in the detail

CHF money market significantly more attractive also due to tax effects (yield to maturity in %)

The CHF bond market is known for not being one of the most liquid bond markets. How does your team find enough investment opportunities in this challenging environment for the money market funds you manage?

Both funds benefit significantly from our position in the CHF bond market. With over CHF 58 billion in assets under management solely in CHF bonds, both funds regularly benefit from attractive crossing opportunities with our CHF funds. These investment opportunities are particularly important as both funds do not charge subscription and redemption fees, allowing investors to place their liquidity cost-effectively.

¹The "Swisscanto (CH) Money Market Fund Responsible Opportunities CHF" (FT class) achieved a net performance of 1.37% in the last twelve months. Since 1 October 2022, the annualised net performance has been 1.29% (as at 31 January 2025).

²The "Swisscanto (LU) Money Market Fund Responsible CHF" (FT class) achieved a net performance of 1.35% in the past twelve months. Over the last three years, it has generated an annualised net performance of 0.79% (as at 31 January 2025).