Swiss Yields Converge With Germany's as SNB Battles Franc Gains

  • Central bank buying has pushed German yields to record lows
  • Switzerland’s policy makers are due to meet next week

The Swiss National Bank’s efforts to stem the franc’s gain may be having unintended consequences.

As the SNB, and other central banks in Europe, ramp up their foreign currency-purchases, short-dated, high-quality bonds are seen as the likely landing spot for their cash, spurring a rally in German two-year notes. That, along with the European Central Bank’s own bond-buying and a demand for havens amid elections in the region, has pushed yields on the German securities below those on their Swiss peers for the first time since 2014. That change in the interest-rate differential threatens to weaken the euro against the franc even further.

The SNB has had to intervene “very strongly of late, at a heavier pace than last year,” said Karsten Junius, Chief Economist at Bank J Safra Sarasin Ltd. in Zurich. The “interest-rate differential in the short-term area has dropped to historic lows, and the exchange rate can only be kept if the SNB absorbs the flows.”

Swiss two-year yields were at minus 0.846 percent as of 12:57 p.m. London time, compared with minus 0.844 percent on similar-maturity German notes. The Swiss yield earlier climbed above Germany’s, and the bonds haven’t closed with a higher yield than their peers since November 2014, before the SNB removed its limit on the franc’s strength.

The franc was at 1.07411 per euro on Friday, having weakened about 0.9 percent in the past two weeks. It ended February at 1.06383, the strongest since August 2015. The SNB’s next policy assessment is scheduled for March 16.

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