Next week both the US central bank and the Swiss National Bank will be speaking within the space of a few hours. First, the Fed will be announcing a decision on interest rates at 8:00pm on Wednesday, 18 June. The SNB will be publishing its monetary policy assessment at 9:30am the next day. The omens could hardly be more different: in the franc zone, the debate is about a return to negative interest rates – the SNB base rate currently stands at 0.25%. Meanwhile, the markets are confident that the US central bank will leave its target rate unchanged in the 4.25% to 4.50% range. Once again, Fed boss Jerome Powell looks likely to resist pressure from the White House. For months president Donald Trump has been demanding, sometimes accompanied by name-calling, that he cut interest rates. Given the imponderables for inflation and the economy that his trade policies entail, however, the Fed is keeping its tinder dry.
Echoing the monetary policy discrepancy, yields from the CHF diverge markedly from those of the USD. The interest rate on the 10-year Confederation bond at the moment is 0.29%, which compares with 4.38% for the US Treasury of the same term. The comparatively high interest rate is an argument for capital protection certificates denominated in USD. Why? Because the issuers structure these products with the aid of a zero coupon bond. As its name suggests, no interest is payable. Instead, when zero bonds are issued they are sold at a discount to their nominal value. The issuers use this difference to finance an option component that enables participation in an underlying. This structure leads to the following rule of thumb: the higher the interest rates in the underlying currency are, the more attractive the possible terms are – and vice versa.
Leonteq is now taking advantage of terms on the USD bond market for a capital protection certificate on gold, silver, platinum and palladium. The choice of underlying is no coincidence either, because precious metals are the measure of all things on the commodities market at the moment. This is particularly true for the segment’s most significant representative, gold. In a world dominated by geopolitical and trade tensions, investors are turning to the safe haven. The USD weakness seen since Donald Trump returned to the White House is also having an effect. The US currency correlates negatively with commodities in general and gold in particular. Meanwhile, high USD interest rates are unable to tarnish the image of the precious metals. Since gold and the like do not generate any current income of their own, the returns that can be earned on the bond market are equivalent to the opportunity cost of holding these commodities. In the current environment, investors appear to be willing to accept this “expense”.
The capital protection certificate offers investors the possibility of enjoying the benefits of rising gold, silver, platinum and palladium prices. The issuer guarantees the full return of the nominal at the end of the three-year term. Even if the enthusiasm for precious metals were to abate, holders of the product would be on the safe side. If prices rise, though, they will be realise a gain. The participation is governed by an equally weighted basket of the four precious metals. In principle the certificates tracks the performance of the basket 100%. However, participation is limited to the maximum amount, with a cap level of 140%. This limit means that the maximum amount repaid will be 140% of the initial capital. Given the comprehensive capital protection offered, this is a particularly attractive opportunity. Please note, though, that the terms outlined do not apply until maturity. A range of parameters will affect the value of the product over its life. In addition to the performance of the underlyings, these include in particular USD interest rates.
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.