SNB’s AA Bond Holdings Rise as France’s Downgrade Shows

The Swiss National Bank’s holdings in AA-grade bonds increased in the fourth quarter, which may reflect downgrades to once top-rated nations such as France.

The share of AAA-rated debt fell to 78 percent of the SNB’s bond holdings in the fourth quarter from 86 percent three months earlier, while AA-grade assets surged to 17 percent from 10 percent, the Zurich-based central bank said today. Government bonds in their own currencies accounted for 82 percent of total SNB assets at the end of December.

France lost its top rating at Moody’s Investors Service in November after it was downgraded by Standard & Poor’s in January 2012, which means its bonds are no longer eligible for the SNB’s triple-A basket. Nomura International Plc estimates that the Swiss central bank holds at least 28 billion francs ($30.7 billion) of French sovereign debt.

“As the SNB uses the ‘average of three’ ratings agency rule for holdings of government debt, Moody’s move meant that as far as it is concerned France moved down from AAA to AA,” Geoffrey Kendrick, a currency strategist at Nomura in London, said in a note today.

Adjusting for currency movements, Kendrick estimates the drop in the share of AAA assets equates to about 28 billion francs. “If we assume the only change was the Moody’s downgrade, this implies that the SNB” held that amount of French debt at the end of the third quarter, he said.

SNB internal guidelines require the central bank to have a “substantial part” of its holdings in government bonds to meet “secure investment” standards. It declined to comment on its debt holdings today.

Currency Reserves

The franc was little changed 1.2358 against the euro at 11:04 a.m. Zurich time. It depreciated to 1.2569 per euro on Jan. 18, the weakest level since May 2011. Against the dollar, the franc was at 91.05 centimes today.

The SNB data also showed that other bonds such as covered bonds and corporate debt account for 6 percent of its assets, while equities accounted for 12 percent.

The share of euro reserves rose to 49 percent of overall currency holdings at the end of December from 48 percent at the end of the third quarter. Dollar holdings were unchanged at 28 percent. Reserves of pounds, Canadian dollars and other currencies such as the Australian dollar also held steady in the period, while the share of yen declined to 8 percent from 9 percent previously.

The central bank has amassed record foreign-currency reserves as it defends its cap of 1.20 francs versus the euro, which was introduced in September 2011 to ward off investors seeking a haven from Europe’s sovereign-debt crisis. The SNB had a consolidated loss in the fourth quarter, spokesman Walter Meier said on Jan. 17, without providing details. For 2012, the central bank expects a profit of about 6 billion francs ($6.6 billion).

The SNB’s foreign-exchange holdings rose to 432.2 billion francs in the fourth quarter from 429.5 billion francs at the end of September, according to today’s data from the central bank.

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