Saturday, 20 October 2018

Analysis: SNB stalls Swiss bonds

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A promising week for the Swiss franc primary was derailed Thursday when the SNB shocked the markets with a surprise rate cut to negative 0.75% and abandoned its FX cap of Sfr1.20 to the euro.

Rates immediately dropped and curves steepened, with swaps negative out to nearly eight-years by mid-afternoon, compared to five-years the day before. The short-end dropped most, with two-year IRS down 22bp to minus 0.445%, while the long end, which initially rose slightly, was dragged down 14bp in the 15-year segment.

To put that in perspective, a new two-year bond would need to pay at least 45bp over mid-swaps to achieve any positive yield. Admittedly, there has been no short-dated paper, except FRNs, for some considerable time as rates have been negative since November 2014.

In five-years, an issuer would need nearly 30bp over swaps to cross the zero-yield threshold. That leaves the longer end, which typically does not appeal to certain investor classes, especially bank treasuries and private bank/retail clients.

The news is thus not good for issuance prospects. Foreign issuers will be forcibly edged out by the basis and yield confluence, described by one syndicate manager in Zurich as “muerte – dead”. Basis levels have not yet moved in reaction to the news. Higher grade names will struggle to bring anything with a positive yield, and investors, understandably, do not want negative returns.

Domestically, corporate Switzerland is also suffering. As Paul Marson, chief investment officer of Monogram, a London based investment boutique, says:

“Swiss companies will largely not have hedged currency exposure, in expectation of a continuing cap”.

Squawks of anguish can already be heard from the likes of Swatch Group, whose chairman Nick Hayek described the moves as a “tsunami” for the Swiss economy.

That goes especially for the export and tourist sectors, which are especially FX sensitive.

The moves precipitated a sharp drop in Swiss shares, off up to 13% on the day, although they bounced a touch to around 9% down coming to the end of the session.

Secondary bonds went totally illiquid as trading stopped, although the main SBI Indices were generally marked slightly up on the day, in the range of +0.33% to 0.75%. In the primary sector, deals in the bookbuilding phase were pulled until the dust settles. Pulled new issues included a PSHypo dual tranche 10yr tap and new 15yr and a seven year DVB Bank senior.

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