UK- Swiss yield gap- A market warning for Gilts and Sterling?
The chart above compares the 10 year yields of UK(Gilts) vs the Swiss 10 year yields. This is a weekly chart. The UK yields have always been slightly higher than the Swiss yields. Ever since the 2008 financial crisis, the yields of both countries were in a downward trend. But from 2020 onwards, the yields of both countries started to rise. But from 2022 onwards, the yields of the two countries started to diverge. The UK yields has started to rise and nearing the 2008 peak at 5.2% whereas the Swiss yields have started to fall The current yield difference is one of the widest ever offering a near 4.6% yield. This chart is a visual representation of the stark differences in the economic outlook of the two countries. Here we explore the reasons as to why this happened.
Following the 2008 financial crisis, the Bank of England was the first to start the QE program to support asset prices buying nearly £875 billion worth of gilts 2009 to 2021. The Bank said that it was buying the bonds to stimulate the economy. The bank created reserves and bought the bonds in an Asset purchase facility. The banks which sold these bonds had their money as reserves with BOE. The Bank of England paid them interest at the bank rate. The idea is to reduce the term premia of longer term government bonds. Also since the bonds that were purchased were yielding higher than the bank rate( BOE kept interest rates at 0.5% between 2009 to 2016. The difference between the bond yield and bank rate was profit for the the Bank of England. It agreed to give back the profits to the Treasury in returns for guarantees to cover liabilities if the Asset Purchase facility makes a loss. When the rates were low, the UK treasury benefitted from the profits of the asset purchase facility(APF). However as the bank increased the rates aggressively in 2021 onwards, the APF started producing losses which was covered by the the UK treasury. Also the Bank of England started it QT program where it sold its assets back to the banks. You can see this by the fall in the BOE total assets. But now that the rates have risen, these bonds were sold at a loss. A conservative estimate of the losses would be about £130 billion.
The Swiss National Bank(SNB) also embarked on QE following the 2008 financial crisis. But in a different way. As the Swiss Franc was considered as a safe currency and the swiss bond market was small. They created reserves and intervened in the Foreign exchange market by buying foreign currency in a bid to weaken the Swiss Franc to help the Swiss exporters. The foreign currency that they acquired during this operation was used to buy foreign government bonds and also in many of the US stocks in a passive manner. Between 2011- 2015, the SNB maintained a floor of EURCHF rate at 1.20. They also maintained a negative interest rate to prevent money flowing into their country seeking safe haven. In terms of size, the SNB intervention was much bigger when compared to the size of the Swiss economy. But because it invested the assets in foreign bonds and stocks, it has been calculated that the estimated profit from its QE operations was around 150 billion CHF.
Currency strength divergence- The significance
This chart compares the yields of the 10 year bonds of UK and Switzerland. The lower line depicts the trend of GBPCHF. When ever there is a yield spread - currently around 4%, money seeks the yield. But surprisingly we see that as the yield spread widens GBPCHF is actually falling. One way to explain this is the fact that the market feels that the risk of UK economic stagnation and the devaluation of the pound is so much higher than the 4% yield from placing a carry trade. This is very telling. And you have to understand also that currently there is no fiscal or economic stress on the UK economy. Now we post a question- What will happen if there was a fiscal problem or a global economic problem which spreads to the UK. What will happen to the pound in that situation. The smart money is already fleeing the UK into the swiss assets in our view. We want to now show you what will happen if we have an event similar to 2008 financial crisis.
Multitude of problems:
The UK is currently facing multitude of problems. We can not make the current administration for the problems. These problems are the result of bad political decisions taken since 1997 when the Labour government came in. Since then UK has fought in multiple wars which have been very expensive. Here are the six core problems at the heart of Britain's current predicament.
1. The Debt Spiral: A Nation Living Beyond Its Means
Let's start with the big picture. UK government debt as a percentage of GDP is at its highest level since the early 1960s. The pandemic and the energy crisis didn't cause this; they simply poured fuel on a pre-existing fire.
Why it matters: Servicing this debt—just paying the interest—now consumes a staggering amount of taxpayer money. This is money that isn't being spent on the NHS, schools, or infrastructure. It’s a vicious cycle: high debt leads to high interest payments, which strain the budget, often leading to more borrowing or painful cuts to public services. It severely limits the government's ability to invest in its own future.
2. The Silver Tsunami: An Ageing Population
This is perhaps the most predictable, yet most daunting, long-term challenge. We have a growing population of retirees supported by a relatively shrinking workforce.
Why it matters: This puts immense, simultaneous pressure on two fronts:
The Treasury: Fewer working people means lower tax receipts, just as the bill for the state pension and age-related benefits skyrockets.
The NHS & Social Care: Demand for healthcare naturally increases with age, threatening to overwhelm a system already under strain.
This demographic shift is a financial time bomb, making the current level of public services increasingly unaffordable.
3. The Hollowed-Out Economy: The Trap of Financialisation
Since the 1980s, the UK, and London in particular, has become a global hub for finance and services. While this brought wealth, it also led to financialisation—an over-reliance on the financial sector at the expense of other industries.
Why it matters: We have seen a steady decline in manufacturing and productive industries. This has created a two-tier economy: high-paying jobs in finance and tech for some, and a proliferation of low-wage, low-productivity jobs in the service sector for many others. It has also made our economy more volatile and vulnerable to global financial shocks.
4. The Strangled Supply: How Planning Laws Lock Out a Generation
You don't need to be an economist to feel this one. The UK has a chronic housing shortage, and the root cause is our restrictive planning system.
Why it matters: Stringent greenbelt laws, local opposition, and a complex bureaucratic process make it incredibly difficult to build new homes, especially in the areas where jobs are plentiful. The result? Soaring house prices and rents that devour a huge portion of young people's incomes, stifling social mobility and acting as a massive drag on the economy.
5. The Immigration Conundrum: Filling the Gaps, Causing Friction
This is one of the most politically charged issues, but the economic reality is stark: the UK has near-record levels of immigration, while also having a significant number of job vacancies.
Why it's happening: It's a direct response to points 2 and 4. An ageing population means more care home workers are needed—jobs that are often poorly paid and physically demanding. At the same time, a shortage of housing and skills training means many British-born workers are either unwilling or unable (due to location or cost) to take these roles. Immigrants are filling essential gaps in our workforce, from agriculture to the NHS, that the domestic population currently cannot or will not fill.
6. The Looming Pension Crisis: A Bill Yet to be Paid
Linked directly to our ageing population is the problem of unfunded public sector pension liabilities. These are promises made to government employees (like teachers, nurses, and civil servants) that are paid out of future taxation, not from a pre-funded pot.
Why it matters: This is a colossal off-balance-sheet debt. As the ratio of retirees to workers shifts, the tax burden required to meet these promises becomes heavier and heavier, threatening future government solvency and crowding out spending on other vital services.
The Vicious Cycle: How It All Fits Together
These problems don't exist in a vacuum. They feed into each other, creating a vicious cycle:
An ageing population increases pressure on the NHS and pensions, raising government spending and fuelling the debt spiral. To manage the debt, the government cuts public investment, leading to a hollowed-out economy with more low-wage jobs. British workers, burdened by high housing costs, are unwilling to fill these roles, leading to rising immigration to fill the gaps, which in turn creates political tension and further pressure on housing and services.
The Muffett Take:
Altough UK is still a top dog, lately they have lagged behind. The problem can be fixed if there is political will. Unfortunately no one yet has taken a risk to fix the problems. As an investor, we need to take a nonbiased view as possible. We need to think about how we can maintain our wealth and how to mitigate losses from a falling pound. Muffett has significant gold positions. He also owns gold miners in his portfolio. Majority of the portfolio has exposure to the US dollar rather than the pound. As things develop, Muffett will alter his strategy .
