In view of the latest central bank decisions, the years-long shortage of investment opportunities for Swiss savers could be about to dissipate. However, investors do not necessarily have to look just to government bonds, which are usually considered very safe: rising interests have another positive influence as well, specifically on structured products. After years of abstinence, issuers are now again able to launch capital protection certificates in Swiss francs on the market – and even with a 100% guarantee. The instruments aim to retain the full capital at maturity and are therefore targeted at investors who shy away from risk, yet at the same time definitely feel the need for a decent yield. In simple terms, capital protection certificates allow participation in the price increase of an underlying asset from a predetermined starting point, known as the strike price, by a factor set previously.
There is a very wide choice of underlyings, with many options ranging from equities through commodities to the money market. It is the latter which is the focus of the latest issue from Leonteq. The issuer has a floored floater on the CHF SARON 3M under subscription. SARON stands for “Swiss Average Rate Overnight”, an overnight rate based on the Swiss franc repo market. Transactions on the repo market are used as a short-term refinancing and investment instrument for liquidity management, so they are an important pillar of the money market. The SNB, too, strikes deals here to implement its monetary policy. Billions of Swiss francs are traded each day on the repo markets, which are commonly regarded as the backbone of the financial industry and central bank activities. The benchmark administrator of SARON is SIX.
Unlike the yields on bonds with a term of at least one year as mentioned above, the CHF SARON 3M is still just about in negative territory. Nevertheless, the trend is likewise heading upwards, with the reference rate posting a noticeable rise over the last six or so weeks especially. While it was still a little above the minus 0.7% mark at the beginning of May, the current figure is only minus 0.56%. This corresponds to an increase of around one fifth. If this pace continues, the CHF SARON 3M would reach positive territory as early as some four months from now. Should the SNB realign its monetary policy sooner than previously expected, however, the zero mark could even be reached in the summer.
The zero line is a critical limit for the capital protection certificate with coupon on the CHF SARON 3M and a term of five years, as the product enjoys a leveraged participation in the yield curve from this point. The interest rate is determined on the observation date every three months and multiplied by 1.25. A quarter of this value is then distributed to owners of the certificate as the coupon for the previous three months. That means investors can leverage their profit from rising interest rates while protecting their capital at the same time. The nominal of CHF 1,000 is fully guaranteed at the end of the term.
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