Switzerland became the first country to see its 10 year bond yield drop below zero this morning after a storm caused by the actions of the country’s central bank on Wednesday. The Swiss central bank announced it would stop capping the value of the Swiss franc.
The market movement means that those buying Swiss bonds today may lose money when the coupon on the debt is finally paid. A key rule for bonds is that as price goes up, yield goes down. As demand increases, the price on the market rises and the amount of money investors recoup when the bond matures decreases.
In the Swiss case, the massive global demand for bonds, driven by quantitative easing in the United States, the expectation of more demand in future from the expected European QE program, and the shock from the country’s monetary decision has driven prices higher than the bonds will ultimately pay out.
Buying bonds that will actually lose you money when they mature is a sure sign that investors are beginning to value safety above all else. Switzerland is, despite the changes to its currency outlook, still seen as one of the safest places in the world to put money, though the unpredictable nature of a world in which its central bank refuses to control the value of its currency could change that.
At a basic level the country’s central bank has decided that it’s no longer worth buying euros in order to maintain export levels. An ECB bond-buying program would weaken the value of the Euro and force the Swiss to accumulate more of the currency, which it expects to depreciate over time, year on year.
Switzerland’s fame as a safe haven for investors has been tested several times over the years, but the tsunami of the last couple of days may be a truly defining moment for the unusually isolated central European country.
“For a developed G10 currency, the 20 percent move in the Swiss franc was extraordinary.”, Societe Generale analyst Alvin Tan wrote in a report on the currency’s movements. The fate of the country’s government debt, and the world bond market, will likely be decided next week as the ECB holds its policy meeting on Thursday January 22.
Switzerland tends to run a budget surplus, though it is expected to break even this year. The country’s debt to GDP ratio is among the lowest in the developed world at 33.8%. These figures make it an impeccably safe place to invest in debt, though investors paying the country to hold their money for that safety.
Shares on the company’s SIX stock exchange fell by more than 4.5% on today’s market as money flowed out of the equity market seeking the perceived safety of the government’s bonds. Shares through the rest of Europe were performing much more strongly, owing to expectations surrounding ECB intervention.
US treasury yields were recovering on Friday after a related drop in yield on Thursday as a result of the Swiss announcement. Investors spooked by Swiss moves on Thursday appear to be softening their view toward a world with a floating Swiss franc.