In this section we describe the evolution of marketable debt issuance. The Treasury’s emission practices have become more predictable and regular from the early 1990s onwards. We first focus on net issuance and then take a closer look at the individual instruments (bonds, bills and notes).
Figure 3 shows yearly debt redemptions and net issuances, i.e., debt issued minus debt coming due. The grey-shaded areas in Fig. 3 mark years of long-term interest rate positioning. These years take into account only the self-declarations by the Confederation in the SFS. During these periods, the Treasury claimed to have engaged in longer-term maturities to profit from a low interest rate level.
In the mid-1970s, marketable debt increased slightly and was primarily funded with an increasing net issuance of bonds,Footnote 21 whereas the issuance of notes was mainly determined by redemptions and market demand. Changes in total debt in the late 1970s and 1980s were primarily covered by increasing internal non-marketable debt, i.e., by increasing internal funding, term deposits, and changes in the debt definition. Thus, constant marketable debt implied that the issuance of all debt instruments was determined by debt coming due and that the net issuance was close to zero. This was particularly the case for the newly issued bills and notes. These instruments’ near constant share in marketable debt during this period (see Fig. 2) is reflected in their zero net issuance and near-constant redemption values in Fig. 3. In the second half of the 1980s, the Confederation faced lower funding needs and a lower or negative net issuance of bonds. However, the Treasury considered the interest rate environment as favorable. Consequently, the Treasury increased its interest rate commitment to reduce the long-term interest burden.Footnote 22 Facing a lower net issuance of bonds, the Treasury therefore called in or converted callable higher-yielding bonds into lower-yielding, newly issued bonds.
Since the majority of bills issued has a term to maturity below one year, their total yearly issued volume is naturally greater than the issued volume of longer-term debt instruments. As the Treasury started a general expansion of the bill program to build up a Swiss franc money market in around 1990 (which also increased the relative importance of this funding instrument as displayed in Fig. 2), this is when bill redemption started to grow. On top of this, and despite the inverse term-structure at the time, the Treasury regarded the prevailing longer-term interest rate level as high. Thus the Treasury increased its short-term debt issuance beyond the build-up intended to promote a Swiss franc money market.Footnote 23 After 1990, the issuance of notes only played a negligible role (see also below).
With the increasing funding needs in the early 1990s, the issuance of both bills and bonds substantially exceeded debt coming due, leading to an increase in net issuance of both instruments. Increasing funding needs persisted in the late 1990s due to continued deficits and in the first half of the 2000s due to the liberalization of former public entities.Footnote 24 Between 1995 and 2005, in the light of the downward trend in interest rates, the Treasury attempted to take advantage of lower funding costs and covered its funding needs increasingly by bond issuance. In the years after 1995, long-term interest rate fixing was intensified by calling in callable outstanding higher-yielding bonds and issuing longer-termed maturities.Footnote 25 Between 1995 and 2005, the share of bills of marketable debt remained constant or even decreased to levels of around 10% to 15% of outstanding marketable debt (see Fig. 2), as increases in marketable debt were financed with a net issuance of bonds that was occasionally greater than the negative net issuance of bills. The fluctuations in the net issuance of bills are also a result of increasing redemptions of bonds issued in the 1990s, indicating that the issuance of bills was also driven by liquidity management needs (such as bridge-funding between the time of bonds coming due and the time of new bonds being issued).
Decreasing government debt since 2006 has changed the picture. In conjunction with reduced funding needs, maturing bonds issued during the 1990s have led to a negative net issuance of bonds since 2006. Between 2006 and 2010, certain factors reduced funding needs and led to a negative net issuance of either bills or bonds. First, before being transferred to the old age and survivors’ insurance (OASI), the funds from the sales of the surplus gold reserves of the SNB were temporarily managed by the Confederation between 2005 and 2007. Secondly, the Confederation profited from the proceeds of the ongoing sale of Swisscom shares, particularly so in 2006 and 2007. Thirdly, in 2009, funding needs decreased due to the proceeds from selling the UBS convertible bond that was obtained by the Confederation in 2008 as part of the recapitalization of UBS.Footnote 26 Since 2010, the variability in net issuance of bills has again been related to other than structural reasons. It is mainly related to liquidity management, i.e., bridge-funding between the time of large bond redemptions in early 2012, 2013, and 2014, and bond issuing.Footnote 27 As outlined above, in 2015, the shift in deliverance of taxes by the cantons due to negative interest rates led to high levels of liquidity followed by a general reduction of market funding by the Treasury, and considerable negative net issuance of bills.Footnote 28
Figure 4a–f shows that the issuance patterns of bonds, bills, and notes differ widely. Even within one category of debt, issued maturities and volumes may differ considerably, as may their standard deviations.Footnote 29 This also holds true for the frequency of issuances. For bonds, again the grey-shaded areas in Fig. 4a mark years of long-term interest rate positioning indicated by SFS. With the exception of the period after the introduction of bills in the early 1990s, evidence from SFS suggests that the issuance of short-term debt seems to be unrelated to interest rate considerations.
Clearly, the issuance of bills shows the most regular and structured pattern in terms of frequency and maturity, i.e., fixed maturities were issued with a regular frequency (see Fig. 4c). Although the program was launched in 1979, bills only gained importance in terms of issued volumes in the early 1990s (see Fig. 4d or Fig. 2). Before this, notes were the preferred debt instrument on the short end of the yield curve. This is why predominantly 3-month bills with a low, stable average volume of around CHF 200 million were issued throughout the 1980s. Given the intention of establishing a Swiss franc money market around 1990, and fostered by the increasing debt levels in the early 1990s, the bill program was expanded by the new issuing of 6-month and 12-month bills. This was accompanied by an increased volume and a greater variability in the size of emissions. From the mid-1990s onwards, the share of bills in marketable debt, and thus the average volume of bills, slowly decreased to approximately CHF 600 to 800 million. However, the variability of volumes issued is still noticeably high, indicating that bill issuances are greatly driven by cash management concerns. Despite introducing longer maturities in the 1990s, the Treasury has kept the focus on the 3-month bill. Around 80% to 90% of the volume of outstanding bills has been issued as 3-month bills throughout the sample period. Consequently, the volume-weighted, yearly issued maturity of bills has only slightly increased since 1990.
Until 1979, short-term government debt was issued in the form of Treasury notes (Fig. 4e, f). The Treasury concentrated on issuing notes with maturities of between 3 months and 2 years. The volume-weighted, yearly issued maturity of notes reveals that the focus of the Treasury was mostly on 1-year notes. While notes show a relatively regular pattern regarding maturity and frequency throughout the 1970s, there is no predictable pattern regarding the average emission volume. The variability in volumes increases with the issuance of larger volumes from the mid-1970s onwards. With the introduction of bills in 1979, notes lost their role in short-term funding. With the decreasing importance of notes throughout the 1980s and 1990s, the issuance of notes became more dependent on funding needs and demand factors. Discontinuities and demand-driven deviations from the standard maturities and volumes are visible in Fig. 4e, f.Footnote 30 The Treasury started to cover a broader range of maturities and the variability of emission volumes increased. However, the Treasury kept a strong focus on three specific maturities (6-month, 12-month, and 2-year notes). Although the number of emissions reached its peak in the mid-1980s, with 30–50 emissions per year, the volumes issued were rather low and the average decreased substantially. This and the increasing debt levels lowered the share of notes in total marketable debt to below 1% in the 1990s (Fig. 2). Nevertheless, the Confederation ceased to issue notes only in 2005.
Several reasons caused the Treasury to issue notes longer than originally envisioned. First, there was the abovementioned increase in funding needs in the 1990s. Secondly, until 2005, Treasury notes were still demanded by banks, as these could be pledged at the SNB’s Lombard facility (a facility similar to the Federal Reserve System’s discount window).Footnote 31 In 2005, the SNB switched to a new facility with the name “liquidity shortage financing facility” (LSFF). Eligible securities for LSFF credits from then on were included in the SNB repo basket that does not contain notes. From 2006 onwards, the old Lombard facility was no longer available. At the same time, the issuance of notes ceased.Footnote 32
Up to the early 1990s, emissions of bonds (Fig. 4a, b) were largely driven by funding needs of the Confederation, either due to budget deficits (in the early 1970s) or redeeming debt (throughout the 1980s). Until 1991, with few exceptions (see below), only bonds with a maturity of between 5 and 15 years were issued. The Treasury focused on bonds of 5, 10, 12, and 15 years. All bonds were exclusively issued as new bonds with a volume of around CHF 200 million (i.e., there were no replenishments and no sales of own tranches—see below). This pattern led to a relatively balanced maturity profile throughout these years.
From 1990 until 2005, growing funding needs went along with a higher yearly net issuance of bonds. This was accompanied by a substantial increase in the frequency and the variability of the volume of bond emissions. Additionally, a broader range of maturities was issued. In 1991, in addition to issuing new bonds, the Confederation started to replenish outstanding bonds on a regular basis (i.e., the Treasury increased the outstanding amount of a given bond through new auctions). Replenishments are meant to increase the marketability and liquidity of bond emissions and thus serve to support the Confederation’s role in constituting the Swiss franc benchmark curve.Footnote 33 This change in issuance behavior can be visually identified by the “diagonal” patterns in Fig. 4a. In 1992, an emission calendar was introduced.Footnote 34 From 1993 onwards, so-called own tranchesFootnote 35 of issued bonds were sold directly and ad-hoc to investors, depending on market demand and funding needs. Additionally, call options on own tranches were sold from 1996 to 2002.Footnote 36
The grey-shaded periods in Fig. 4a indicate periods of long-term fixing of interest rates as indicated by the Treasury in the SFS. Two such periods took place in the late 1980s and late 1990s. The most recent period started in 2010 and is associated with the period of ultra-low interest rates. When engaging in interest rate fixing, the Treasury issues bonds with longer maturities and increases the volume-weighted yearly issued maturity in comparison to preceding years.Footnote 37 Particularly at the beginning of these periods, the value-weighted issued maturity increased from the long-standing average and important 10-year benchmark to around 15 years. However, until 1995, most of the bonds issued, along with the larger emissions, were still issued with a maturity of around 10 years. The Treasury started to issue longer-term bonds more regularly only after 1997.Footnote 38 After 1997, the volume-weighted yearly issued maturity slowly approached 15 years and remained constant at this level until 2010. Thereafter, the on-going issuance of long-term maturities has ensured increases in the volume-weighted maturity of both issued debt and outstanding marketable debt (see Fig. 5).
The period in the late 1980s illustrates that active, long-term interest rate positioning must not necessarily lead to corresponding changes in the value-weighted maturity of outstanding marketable debt, and it may be difficult to empirically capture the Treasury’s self-declared, long-term interest rate positioning. Several reasons can be responsible for this. For instance, new long-term issuances might not reach a volume sufficient to move up volume-weighted outstanding debt maturity. Other factors such as an increase in the share of short-term debt (i.e., bills and notes) might also contribute to a decrease in maturity, despite long-term interest rate positioning. Technical factors such as unbalanced maturity profiles may also dampen the effects of long-term issuance.Footnote 39
The change in strategy in recent years toward more long-term or ultra-long-term bonds is clearly related to the unprecedented low level of interest rates from 2010 onwards. After 2012, almost half of the issued bonds had a maturity of 20 years or longer. Therefore, the volume-weighted yearly issued maturity increased substantially and peaked at 22 years in 2014, when, for the third time in history, a 50-year bond was issued. It has subsequently been replenished intensively.
With regard to issued volumes, the increased frequency of bond emissions seemed to be insufficient to satisfy funding needs from 1993 to 1996. As a consequence, the average emission volume increased substantially. Figure 4b shows that low size, own tranches were sold with a high frequency from 1996 to 2006. This lowered the average emission size back to its historical average range of between CHF 200 and 300 million. However, from the mid-1990s onwards, emission volumes have varied more strongly compared to before. Figure 4 reveals that the volumes of sold own tranches have been rather low compared to conventional emissions—i.e., auctions of new issues and replenishments. The last two have accounted for most of the issued bond volume.
While it is also on account of the Treasury’s stronger demand orientation, the increased frequency and use of different procedures for issuing bonds, and the higher variation in emission volumes, reflect the need to obtain funds by all means between 1993 and 2005. Together with the decrease of total debt from 2006 onwards, the frequency of bond emissions, the relative importance of own tranche sales, the variation in emission volumes, and issued maturities have decreased. From 2010 onwards, bonds with higher volumes came due and the corresponding refunding needs—although marketable debt remained constant—led to a slightly higher emission frequency and average volumes. However, since 2010, bond issuance has followed a more regular pattern, as the variances in volume and maturity have returned to lower levels.Footnote 40