Developments on the Swiss franc capital market and the SNB's monetary policy

Andréa M. Maechler, Member of the Governing Board

Money Market Event, Geneva, 16.11.2017

Against the backdrop of low interest rates worldwide, the cost of borrowing has steadily fallen in recent years. The SNB's policy of negative interest has further accentuated this trend in Switzerland. Despite this, the Swiss franc bond market has contracted in recent years.

This is primarily due to the decline of the foreign segment. The domestic segment, by contrast, has grown continually, mainly as a result of higher issuance by the central mortgage bond institutions and corporations. Nevertheless, bank lending continues to be the most important source of external financing for Swiss companies.

In the public sector, the volume of outstanding bonds has fallen over the last ten years. Although the volume issued by the cantons and municipalities has increased, that issued by the Confederation has decreased markedly.

The decline of the foreign segment is largely attributable to lower issuance by European banks. Moreover, certain distortions on the foreign currency swap market have made financing on the Swiss franc bond market more expensive for foreigner investors.

Low interest rates have made Swiss franc bonds less attractive in relative terms. This is borne out in several developments, not least in the declining share of foreign investors on the Swiss franc bond market since 2008.

The SNB has been active in the foreign exchange market since the global financial crisis and the European debt crisis in order to react to greater demand for Swiss francs and prevent renewed appreciation of the currency. Investors have placed only a modest portion of their newly acquired Swiss francs in Swiss franc-denominated securities.

Instead, investors have increasingly built up additional Swiss franc positions in the form of Swiss franc forward transactions. In other words, demand for Swiss franc positions in the form of deposits is less strong than it has been in the past.