Last week the Swiss National Bank pushed the policy rate back to 0%, a 25‑basis‑point cut that nudged sight‑deposit rates down to a whopping -0.05%. After nearly two years of gentle cuts, we’re tiptoeing once again along the edge of Negative‑Rate Valley. Remember all the folks who swore we’d never revisit that terrain? Here we are.
Why “zero” feels so weird
Investing is mostly about spreads: the equity risk premium, credit over governments, illiquids over liquids. Everything is relative…until you slam into the red‑painted 0% line. Crossing from +5 bps to 0 isn’t mathematically different from sliding 0 to –5 bps, but the psychology is night‑and‑day. Zero is the scale reading that flips a diet into panic mode or the calendar age that makes you buy running shoes. The number itself warps our perception.
Déjà‑vu all over again
Zero isn’t a black hole; it’s just another datapoint on a very long axis.
You’d think a second ride on the negative‑rate roller‑coaster would feel familiar. Markets may have short memories, but investors have even shorter emotional ones.
Gone is the notion that we are here because, allegedly, Switzerland is in deflation; let’s put aside those very understandable conspiracy theories about the fact that Switzerland has never seen deflation (for sure not health insurance companies). We should always think in real, not nominal terms: who cares if the rate is 0 or negative, what’s my real yield should matter.
The timing couldn’t have been better. Or worse. Just yesterday, half of Italian personal finance Reddit was doing cartwheels over the “crazy high” yields on their cash accounts. Never mind that inflation was running a few percentage points (not basis points) above those yields. They were locking in a guaranteed –2% real return and celebrating like they’d just beaten Buffett.
Now? Inflation’s cooled off. Real yields are probably positive. But nominal rates have come down, so the mood has flipped from euphoria to existential dread.
This whole situation is a great reminder that what people remember about markets often has very little to do with what actually happened. Ask someone if they were making money in cash in 2022 and they’ll probably say yes—because rates felt high. Ask them now and they’ll say no—because the number on their screen went down, even though they might finally be beating inflation.
Will rates in Europe go back to zero or even negative? I don’t know. Nobody does. But that’s not really the point. The lesson isn’t about the direction of interest rates. It’s about the stories we tell ourselves when they move, and how those stories shape our behavior far more than the math ever does.
The graph starts, roughly, when rates hit zero in Europe.
The orange line is an ETF with intermediate duration, the blue line is a money market ETF. The common idea is “why would you own bonds in a 0 to negative interest rate environment?”. Well, the orange line is there to remind you that what you should care about is the term premium, not where the risk-free rate is. Using the risk-free rate as a trading indicator is just a poor idea.
Sure, eventually rates went up, and sure, when they did, the orange line took a serious beating. It still beated the 0 you got stashing cash under the mattress.
The nice thing about plain‑vanilla bonds is their honesty: buy one today and, barring a default, you already know the exact number of euros you’ll get back at maturity. If that coupon is zero, your payoff is your principal. Whether that’s smart or silly comes down to one question: what happens to inflation between now and then? Your future spending power—not the sticker yield—is what ultimately funds college, retirement, or the beach house. Knowing in advance your nominal, instead of real, spending power gives you 0 insight.
Remember, “earning 0%” isn’t automatically dumb. Gold and Bitcoin also pay zero in coupons, and plenty of portfolios still carve out space for them. Yield is only part of the story.
Of course, many investors hate the idea of locking up money at 0%. Fair enough. But then the game shifts to market timing: When do you bail on bonds and when do you jump back in? That’s a valuation call, and valuation models for bonds work about as well as they do for stocks: good at setting a floor, lousy at calling the ceiling (as Matt Levine put it in a recent conversation with Cliff Asness).
Swap bonds for cash and you sidestep mark‑to‑market pain: great! But you also forfeit mark‑to‑market upside if rates crash in a crisis and bond prices moonwalk higher. Every alternative carries its own baggage [yes, there is no assurance this time rates will stop at -50bps].
Roger Nusbaum has spent the last year (or more) looking for “bonds without duration”: as I wrote on this blog many times, I am sympathetic to what can happen to bonds in the mid-term due to inflation. One of his (and mine, if I had a way to invest) favourite alternatives are Nat Cat bonds; the problem is that no one would invest 40% of their portfolio in them (as in the 60/40). We need many alternatives if we want to move away from duration.
Which is why a “Permanent Portfolio”‑style mix still appeals: each leg shines under different skies. Sure, one slice will stink if inflation flares up, but something else in the box should bail you out. It trades the tactical headache of perfect timing for the chronic headache of holding stuff that’s occasionally underwater. But hey, that’s the cost of sleeping at night.
The Gary Stevenson trade (from my actual life)
You’ve got CHF 100m. One month to park it. Two choices:
- Deposit it in CHF. Take what the Swiss market give you.
- Or do the FX swap thing—turn CHF into USD, deposit USD, hedge back via the swap. Lock in your terminal CHF. Done.
No currency risk. No rate risk.
In theory, no difference. Covered Interest Parity. One of those things that’s supposed to hold because arbitrage. But theory is tidy, and markets…aren’t.
Here’s what actually happens:
The CHF deposit usually yields more than the synthetic CHF (swap + USD leg). Not by a lot, eh.
Why?
Because the world has a structural appetite for dollars, more so since 2008. Everyone’s reaching for them: the swap market doesn’t lie, it prices the imbalance. Which means: the synthetic route pays less.
Retail doesn’t see this directly. But, for example, it shows up when they hedge USD exposure back to EUR or CHF. The cost isn’t just the interest rate differential—it’s also this basis.
Ex‑Citi trader Gary Stevenson built a “legend” around this exact imbalance. Working for an American bank gave him a cheap pipeline of dollars to lend out through short‑term FX swaps. Combine that “dollar scarcity” tailwind with a positively sloped U.S. yield curve, and a bet that rates would stay low, and you had a tidy carry machine.
Over the years, though, the story morphed. His narrative spotlight drifted from “I supplied scarce dollars” to “I nailed the macro call on rates.” Convenient, sure, but it leaves out the structural juice that made the trade hum in the first place.
A colleague reminded me of the global dollar shortage today. Got me thinking: why that part of the story faded? Probably because it’s less sexy. No vision. No prescience. No path to Westminster 😉 Just a structural trade. A dull edge. But that’s how most real trades work. They’re boring. They exploit dumb pipes and crowded flows. They’re not about calling the Fed.
Narratives drift. We remember the part that flatters us.
What I am reading now:
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