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Negative interest zero coupon bonds are back for Switzerland. Buying bonds with negative yields can be due to two reasons:

  • We make the assumption that the value of the returned CHF currency, at the bond’s maturity, would be increased.
  • We make the assumption that the currency remains as it is, but any alternative investment presents a larger perceived investment risk (risk of credit, market, liquidity…etc)

The first reason is hardly a very strong one: given the 20% already appreciated value, there is not much room for the CHF currency to grow. About the second reason there is not much that can be done: the perceived alternative risk, be it fear or real, is an inner believe.

A way to stop the strong CHF value is the SNB to print money. But this leads to CHF, internal, inflation which, in long term, gradually erodes the competitiveness of the Swiss exporters, due to increased internal prices. Leaving the things as they are, this might be harmful for exporters: for the same quality, people will prefer to buy cheaper products. The words to stress here are “for the same quality”. To shield the CHF value increase, there is not the SNB to react, but the exporters, improving on the quality of exported items  and “Made in Switzerland” becoming a stamp of quality, if it not already is.

In any case, one of the  International Monetary Fund’s stress tests, published in September 2014, implied « resumption of ‘safe haven’ inflows to Switzerland, leading to a reassessment of the existing exchange rate floor » and output growth in Switzerland falling to due to the appreciation of the Swiss franc. And non-systemic Swiss banks proved to be sufficiently capitalised for such conditions, while the systemic ones had large remaining capital buffers, exceeded the currently defined capital ratios.