The decision of the Swiss National Bank (SNB)

After lowering its policy rate to zero percent at the end of Q2 2025, the Swiss National Bank decided at the end of Q3 (September 2025) to keep it at this level. The background is that inflationary pressure has weakened compared to the previous quarter and is tending towards slightly negative levels, raising the risk of deflation, while the strong Swiss franc has been suppressing import prices and further dampening inflation. This raises the question of how the economic situation is affecting the debt markets.

The effect on bond markets in general and the Swiss market

Bonds are redeemed at par value at the end of their term, except in the event of default. Nevertheless, fluctuations in interest rates matter. For holders of bonds, falling interest rates are generally good news because the value of their portfolio is rising as the prices of the bonds in the secondary market rise. In turn, rising interest rates are bad news for them because the value of the bonds they hold is falling. Long-term bonds are particularly sensitive to interest rate changes because their longer duration makes their net present value more affected by shifts in the discount rate. With low interest rates, new investment grade bonds become less attractive and some investors may turn to high-yield bonds.

High-yield bonds in particular

High-yield bonds, pioneered in the late 1970s and 1980s by Michael Milken at Drexel Burnham Lambert as a financing tool for companies without investment-grade ratings, are considered one of the more lucrative income-generating investment options. They are typically issued by companies that are more capital-intensive and carry higher levels of debt, which can make them appear riskier from a credit perspective. Although they pose greater risk than government or investment-grade corporate bonds, they also offer the potential for significantly higher income. This elevated income stream can help compensate for the increased risk of principal loss. Actively managed strategies that aim to limit losses while preserving income may deliver superior performance.

Moreover, high-yield bonds often show lower correlation with other segments of the fixed income market, making them a valuable tool for diversifying a broader bond portfolio. They also tend to be less sensitive to interest rate fluctuations. Beyond income, there is also potential for capital appreciation, similar to equities, the value of high-yield bonds can rise due to improved company performance or broader economic growth. While they are generally less volatile than stocks due to their higher income component, their performance tends to align more closely with equities than with longer-duration, lower-risk investment-grade bonds.

The US market for high-yield bonds remains the largest and most liquid. However, global markets now offer broader opportunities, including diversification in Europe and stronger growth in emerging economies. Mid-2025, the EU high-yield bond market was particularly strong as investors reduced their exposure to the US. In Switzerland, only few companies issue sub-investment-grade bonds, i.e. high-yield bonds. Swiss institutional investors are mostly exposed to high-yield through Euro-denominated or global funds. Liquidity is limited, issuance is sporadic, and the domestic market is closely linked to the broader European high-yield segment. However, with lower interest rates, high-yield bonds are generally becoming more attractive.

Selected legal aspects

High-yield bonds raise specific legal issues both internationally and under Swiss law, particularly in the areas of covenant structures, enforcement, and restructuring. Internationally, practitioners must carefully draft covenants, negative pledge clauses, and change-of-control provisions and representations & warranties to balance issuer flexibility with investor protection.

Swiss companies typically issue high-yield bonds via European investment banks, using New York law-governed indentures for international offerings and rely on international standards, in particular US regulations such as Rule 144A and Regulation S. However, bonds with high-yield issued under Swiss law are also being noticed.

The offering of high-yield bonds to Swiss investors or from Switzerland is governed by the Swiss Financial Services Act (FinSA). FinSA imposes prospectus and disclosure duties and determines whether bonds may be offered to retail or only professional investors. Special attention should be paid to the risk section in the prospectus given the particular risk profile of companies issuing high-yield bonds. Swiss issuers usually align their documentation with international market standards, but practitioners must ensure compliance with Swiss distribution rules, tax considerations (e.g. withholding tax implications), and potential re-characterisation risks in restructuring or enforcement scenarios.

Compared to the U.S., where Chapter 11 proceedings allow debt-for-equity swaps and extensive restructuring of bondholder claims, Swiss law provides a more limited debt restructuring moratorium (Nachlassstundung), with less flexibility to impose solutions on dissenting bondholders. These differences mean that recovery expectations and covenant protections must be carefully calibrated when structuring high-yield bonds with a Swiss nexus.

Some tax considerations

Switzerland does not levy a general interest withholding tax (WHT) on interest payments made by a Swiss borrower. However, by exception a withholding tax is levied if a Swiss borrower obtains funds from so-called ”collective financing”. Therefore, Swiss resident companies issuing debt instruments need to comply with the so-called Swiss 10/20 non-bank lender rule, which restricts the number of non-bank lenders in order to avoid requalification as a “bond” or “debenture” for tax purposes. Therefore, careful monitoring in high-yield issuances is required.

To the extent that a Swiss borrower breaches the Non-Bank Rules, such borrower will be required to deduct 35% withholding tax on any interest payment made under the respective bond or cash debenture and remit the tax amount to the Swiss Federal Tax Authority. This tax can be reclaimed by a Swiss resident investor under certain conditions, such as proper declaration in the tax return, and by a foreign investor fully or partially based on a double taxation agreement, if any. No WHT applies to bonds issued by a foreign issuer.

Furthermore, transactions involving bonds on the stock exchange can be subject to a securities transfer stamp duty of up to 0.3% if a Swiss securities dealer (as defined by the relevant law) is a party or intermediary to the transaction and no exemption applies. However, primary market transactions on debt instruments are fully exempt from stamp tax. Foreign contracting parties do not have to pay any securities transfer stamp duty on foreign bonds (Eurobonds). The securities transfer stamp tax amounts to 0.15% for domestic bonds and 0.3% for foreign bonds. The tax is calculated in each case on the consideration paid, i.e., on the price paid when buying or selling a bond.

Tokenisation 

In March 2025, the Swiss Financial Market Supervisory Authority (FINMA) granted approval for the first trading facility operating on distributed ledger technology (DLT), marking a significant milestone in the evolution of Switzerland’s financial infrastructure. Tokenised securities, including bonds, may now be traded on BX Digital AG, with access restricted to regulated market participants, including licensed banks.

This development builds on the legal foundation of the DLT Act, which came into force in 2021. The Act offers a comprehensive and forward-looking framework for integrating blockchain solutions into the financial sector. It notably enables the tokenisation of traditional instruments such as bonds, improving liquidity, market efficiency and accessibility. A diverse ecosystem of service providers including Aktionariat, Tokengate or Taurus has emerged to support the issuance, custody and transfer of tokenised assets within this framework.

The reliability of Swiss tokenisation and smart contracts has increased with the legal and technical standardisation by the industry association Capital Markets & Technology Association (CMTA). As a member, Loyens & Loeff Switzerland LLC is actively supporting CMTA’s standardization activities.

Security Rights  

High-yield bonds issued out of Switzerland are, as a rule, secured. Typical collateral includes share pledges, bank account pledges, intra-group receivables pledges, and occasionally real estate or IP rights pledges. The security documents are generally governed by the law of the jurisdiction where the collateral is located; Swiss law will apply where the asset lies in Switzerland. In such cases, Swiss legal counsel plays a central role, and a Swiss legal opinion is standard for closing. Swiss law does not require notarization of the pledge, making the procedure more time- and cost-efficient. Compared to other jurisdictions, this makes the issuance of high-yield bonds simpler.

Given the higher risk profile of high-yield bonds, investors and counsel must carry out particularly thorough due diligence, with special attention to the ranking and enforceability of collateral. A recent focus has been on ensuring genuinely first-ranking pledges, which requires detailed legal and factual review.

Summary

The low-interest rate environment raises the attractiveness of high-yield bonds, which offer attractive returns and diversification benefits. In particular, they can open up access to capital markets for Small and Medium-sized Enterprises, enabling broader financing opportunities and growth potential. However, investors must navigate complex legal and tax frameworks, also in Switzerland, where regulatory nuances and limited market liquidity pose specific challenges. This includes drafting the bond documentation, structuring the security package, and conducting thorough due diligence. As the digital infrastructure evolves, new opportunities are emerging. Ultimately, the interplay between monetary policy, market dynamics, and legal structures invites a deeper reflection on how investors can balance yield, risk, and resilience in a world of rapid financial innovation and shifting macroeconomic tides.