Negative interest and saving for college in Switzerland

  • Saving for college is hard enough, but with a negative interest environment as discussed in a previous blog, it's REALLY hard... 
  • Rates are negative on some Swiss government investments
  • Not likely an immediate concern for U.S. investors

COLLEGE SAVING IN SWITZERLAND

 
 

In Switzerland, the government recently sold 10-year government bonds at an ever so slightly negative rate of - 0.055%. What does that mean? Imagine a Swiss family trying to save for college for their eight-year-old child. Say they decided to invest 20,000 Swiss Francs in 10-year Swiss government bonds. At the end of 10 years they would get back roughly 19,890 Swiss Francs. About 100 less than they started with. If they had put it in their mattress, at least they would still have 20,000 Swiss Francs when Pierre-Yves turns 18.

Luckily there are many investment alternatives to 10-year Swiss bonds and this is one of the few situations where Swiss customers actually face negative interest rates. So far, the negative rates have generally been passed between banks and government institutions and the banks have simply absorbed the loss on negative interest as a "cost of doing business"

But if rates go further negative, things will get interesting. The banks may decide that at that point aggressive lending becomes preferable to the negative rates they are paying or they may pass the cost (i.e. the negative rates) on to business customers or even on to retail consumers and many more investments would yield "negative returns".

Certainly many investments can and do lose money over certain periods of time, but those are generally risky investments. The investments here are supposed to be "ultra safe" or even "guaranteed". Would you leave your money in the bank if the rate is negative? Would you buy a government bond with a negative rate?

Fortunately, in the United States, the Federal Reserve has indicated that they plan to slowly increase rates back to more historically normal levels. U.S. Markets have been quite volatile in late 2015 and early 2016 and there are many risks facing U.S. investors, but an immediate action to lower U.S. interest rates negative probably isn't one of them.

If you would like to discuss your College Saving strategy or the potential impact of negative interest rates in further detail, please schedule a free consultation.

PLEASE REMEMBER:

- Investing and investment management involves risk, including the loss of your initial investment or any investment gains.

- Past performance is no guarantee of future results.

- This generic information is provided for educational purposes only and should not be construed as a recommendation for any individual to take a specific action.

- Please invest prudently and seek professional help from a financial advisor, investment manager, accountant, lawyer or other professional on matters that you are unsure of or that are unique to your personal circumstances.

- Financial Advisor and Investment Management Services provided by J. Bradford Investment Management, Nashua NH.