The first three quarters of the 2022 stock market year are now over, with the interim balance sheet on equity markets deep in the red. On 30 September, for instance, the SMI was trading at more than a fifth below its closing rate for 2021. Domestic large caps had actually started the year at an all-time high. It would not be long, though, before the Russian invasion of Ukraine especially heralded a new era. Above all else is the great suffering of the people affected by the war. On the economic front, the steep rise in energy and raw material prices in particular has left deep scars. This has weighed heavily on the economy, already suffering from existing bottlenecks in supply chains. At the same time, high inflation has forced central banks to change track sharply, with interest rates thus now hovering at levels not seen for a long time.
The same applies for SARON, the Swiss Average Rate Overnight, which is regarded as a reference interest rate for the Swiss franc. It reflects the terms on the secured money market, serving as a reference both for completed transactions and for binding price setting. SARON is the result of a process of reform that the SNB undertook together with the private sector from 2013. SARON swaps, which are interest rate swaps between financial institutions, first began to be cleared pretty much exactly five years ago. Also in October 2017, the national working group for reference interest rates in Swiss francs, or NAG for short, recommended SARON as an alternative to CHF LIBOR. On 31 December 2021, the change was finally made: after LIBOR had been fixed for the last time, the age of SARON began.
Among the broad spectrum of money market rates is the 10Y CHF SARON Swap Rate. The last few months have seen a huge rise in the rate, which banks use when refinancing mortgages over ten years, for instance. Whereas it stood close to zero twelve months ago, the swap rate has now climbed above the 2% mark for the first time since early 2010 (see chart). Leonteq is once more utilising this highly regarded reference rate as an underlying for a new issue. Denominated in CHF, the barrier reverse convertible on the 10Y CHF SARON Swap Rate comes with an attractive coupon. The payout of 15% p.a. is made regardless of the further movement of the underlying. By contrast, redemption of the nominal is dependent on the 10Y CHF SARON Swap Rate. However, the repayment is partially protected: the BRC has a low barrier of 50% of the initial fixing.
Leonteq is structuring this new issue using a European option. In other words, the product is not monitored continuously from the start. Instead, it is reviewed on the maturity date in a year. If the underlying is above the barrier at that time, repayment is made in full and the investment delivers the maximum return. Should the 10Y CHF SARON Swap Rate drop by half or more, however, the partial protection lapses. The redemption would then be reduced in line with the fall in the underlying. In this case, the high coupon cushions the losses somewhat. To conclude, the rapid climb in yields is once more allowing attractive product terms to be realised in this investment class too. It may be hard to image a further turnaround in interest rates, this time downwards, at the moment. Nevertheless, the turbulence of the first three quarters of the 2022 stock market year has demonstrated once again how quickly the mood can change. To that extent there would be no harm in having proper risk buffers. In addition, the European barrier gives the underlying plenty of room for manoeuvre in the next twelve months.
We look forward to answering all of your questions about our products and how they are traded. Please don't hesitate to get in touch! Phone: 058 800 11 11, email info@leonteq.com or contact us here.