Unconventional Yields

Swiss Bonds are negative out to 10 years. They briefly went negative out to 15 years in the wake of the sudden removal of the Swiss National Bank peg to the euro back on January 13 as shown in the following chart.

Swiss 15-Year Bond Yield

Yield on 20-year Swiss bonds plunged to 0.10% on January 13 as well. Today, you can get 0.19% for 15 years or 0.31% for 20 years. That’s how crazy things are.

SNB Warns of “Temporary Deflation”

Please consider SNB Warns of ‘Difficult Times’ as Currency Move Hits Home

Switzerland is facing “difficult times” and a short period of deflation following January’s abrupt unwinding of a currency peg, one of the Swiss National Bank’s most senior policy makers said on Thursday night.

The comments from Fritz Zurbrugg, one of three permanent members of the SNB’s governing board, show the impact of the January 15 currency move on an economy often regarded as a safe harbour during the eurozone crisis. 

The Swiss franc has shot up in value since the removal of the peg that capped it at SFr1.20 per euro, making Swiss exports and Swiss holidays more expensive. A euro is now worth SFr1.05.

Mr Zurbrugg said that the fall in prices that Switzerland faces is “temporary” and would not threaten price stability in the medium term. “A damaging deflationary spiral is not expected.”

Swiss inflation is already in negative territory, with prices falling 0.8 per cent in February — worse than the 0.3 per cent fall in prices across the eurozone in the month.

The SNB complemented January’s currency move by reducing deposit interest to -0.75 per cent in an effort to prevent a wave of cash flowing into Switzerland in anticipation of the Swiss franc’s rise in value.

The introduction of negative interest is already having the desired effect,” said Mr Zurbrugg, pointing to falling interest rates across the board.

“It is important that the negative interest rate be allowed to take effect and help to bring about a weakening of the Swiss franc,” he said. “Efforts to circumvent negative interest rates by obtaining exemptions or shifting to cash are not in the interests of Switzerland as a whole in the current climate.”

Speaking at the same event, Dewet Moser, an alternate member of the SNB’s governing council, said the central bank had more tools it could use to make sure it achieved its policy objectives.

“If required, the SNB will continue to deploy unconventional methods for monetary policy implementation,” he said. “Equally, it will continue to take account of the exchange rate situation and, if necessary, will intervene in the foreign exchange market.”

Unconventional Measures

It is rather amusing (a word I am using a lot lately) to watch competitive efforts of central banks to destroy their currencies to ward off what should be a welcome event – stable to falling prices.

Instead of welcoming stable prices, the Swiss National Banks promises to deploy more “unconventional measures” including another attempt at currency intervention, to achieve what they already have.

Let’s take a look at the “stability” of the last peg and what happened the day it was removed.

Swiss Francs vs. Euro

If that’s not the epitome of stability, what is?

If by some chance that does not look like stability, don’t worry. Alternate member Dewet Moser says the central bank has “more tools” to achieve desired stability.

Heaven forbid should any currency ever become a “safe harbour“.

Clearly, “safe harbour” is nothing but a wart on Cinderella’s nose. No central banker could ever allow that to happen. 

Mike “Mish” Shedlock