Bund sell-off puts further pressure on EUR/CHF exchange rateThe first consequence of the Bund sell-off is that the yield spread between 10 yr. Eidgenossen (currently at 0.59%, on June 1 at 0.52%) and 10 yr. Bund (at 1.59%, on June 1 at 1.17%) is getting bigger. Especially when risk averseness against Germany reigns and investors go out of German Bunds, then other secure government bonds like UK Gilts or the Swiss Eidgenossen are in high demand, putting further pressure on the EUR/CHF exchange rate.
How much will the SNB lose when German Bund yields double ?As we explained before, the SNB euro investments essentially consist of German Bunds, even if recent excessive Bund prices triggered some SNB moves into Dutch, Austrian and French short-term notes. The SNB's average bond duration is four years. Since 4 or 5 year Bunds show a similar behavior as the 10 year one, we do the calculation with the 10 year Bund: If 10 year Bund yields really double, this would imply that its price falls from 141 (we use the Bund future equivalent), to 124, to 88% of its value. Given that 52% of the SNB reserves are in Euro and assuming that at least half of them are the more volatile 5-10 years German Bunds, this implies that the SNB would suffer valuation losses of 3% of its 340 bln CHF currency reserves, i.e. around 10 bln. francs.
Double-negative effect for the SNBAs result we obtain a double negative effect for the Swiss National Bank: Further pressure on the EUR/CHF exchange rate due to risk-averse investors leaving the German Bunds for the Swiss Eidgenossen and losses on the SNB's Bund Forex positions.
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Tags: Austrian economics,Bunds,Duration,Eidgenossen,Euro crisis,Euro exit,franc,German Bund,Government Bonds,Merkel,Swiss National Bank,Swiss Risk Averseness,Switzerland