FX Comment: Switzerland sells the first negative yielding 10y bond ever

by: Georgette Boele , Kim Liu

  • Switzerland sells the first negative yielding 10y bond ever
  • …as official rates have become far more negative than in the eurozone…
  • …and safe haven demand and repatriation supported the Swiss franc and Swiss bonds

Switzerland has become the first major country to auction a 10 year sovereign bond at a negative yield. This means that investors will receive less money than they initially invested when the bond will redeem after 10 years. The auction was part of a dual sale. Switzerland sold a total of 377.9 CHF of bonds maturing in 2025 and 2049. For the bond maturing in 10 years, a negative yield of -0.055% was reached. To compare, the yield on the German 10 year benchmark bond is currently at 0.16%.

The question is why the 10y yield has turned negative? The Swiss National Bank has negative official rates. Since it eliminated the floor in EUR/CHF on 15 January of this year, its official target range is  -1.25 to -0.25% with 3 months LIBOR of -0.75%. These rates are far below the ECB’s official rates. Therefore, they drag down the whole Swiss yield curve.  In addition, the ECB started to purchase sovereign government bonds. This has pushed eurozone government bond yields lower, especially the ones with high sovereign credit ratings. Switzerland is a triple A rated country and has therefore profited from demand for high quality government bonds. Moreover, waves of risk aversion because of the developments in the Middle East (Yemen) and sceptism about Greece have also supported the Swiss franc and Swiss bonds, driving down their yields.

The latest data of SNB FX reserves show an increase in March in foreign exchange reserves from roughly 509bn CHF to 522 bn CHF or a 2.5% increase. This month the Swiss franc strengthened versus the euro and sterling but weakened versus the US dollar, yen and Canadian dollar (these are the currencies in their FX reserves). According to our calculations, this implies that currency moves were not the reason why FX reserves rose. Instead, we suspect that the central bank intervened again, through repatriation of funds by domestic investors could also be an important reason for the increase in FX reserves.

Going forward we expect downward pressure on the 10y Swiss yields to continue, because of downward pressure on the euro and supply imbalance of high quality paper in the eurozone. Indeed, Swiss bond yields will likely further into negative territory. Swiss domestic investors have experienced the impact of significant currency movements so far this year. It is likely that this experience has given them a stronger home currency bias. It is also likely that the Swiss National Bank would aim to minimize the impact of euro weakness on the Swiss franc. Therefore, the Swiss National Bank will probably ease monetary policy further in the form of lower official rates, FX interventions, launching QE or a combination of these instruments. We expect the Swiss franc to weaken versus the US dollar this year, with our year-end target of 1.11. We expect EUR/CHF to stay close to 1.05 with our year-end target of 1.05.