Switzerland’s bond market shows the nation is being paid to borrow for as long as five years, and analysts say a hunt for the safest assets may send yields on even longer-maturity debt below zero.
Swiss borrowing costs for seven years slid to a record-low 0.151 percent on July 23, according to data compiled by Bloomberg. They’re following the course of five-year yields, which turned negative on May 31 for the first time since Bloomberg began collecting the data in 1994.
“We cannot rule out that 10-years will approach the zero level, and then probably find a way below it,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA (UCG) in Munich. “Investors who are purchasing Swiss government bonds with yields at 0.5 percent will probably also purchase bonds at zero yields or even at negative yields.”
A rate below zero means investors who hold the debt to maturity will receive less than they paid to buy it. The risk of greater losses on alternative investments, including a slump in Italian and Spanish securities in the past quarter, is boosting demand for Switzerland’s bonds as a store of wealth, even as inflation threatens to destroy more of their value.
Swiss five-year notes yielded 0.01 percent at 5:39 p.m. in London, after closing at minus 0.007 percent yesterday. The two- year yield was at minus 0.406 percent, after falling to a record of minus 0.462 percent two days ago. Ten-year bonds yielded 0.527 percent.
Swiss debt has returned 1.8 percent in the past three months, the least from AAA rated countries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. While that trails German debt’s 3.1 percent return, it compares with losses of 7.4 percent for Spain’s bonds and 3.8 percent for Italy’s.
Investors are ready to pay to be “sure they will get their money back,” said Yannik Zufferey, head of Swiss fixed-income in London at Lombard Odier Investment Managers, the asset- management unit of Geneva’s oldest bank, which oversees $174 billion. “It is getting less and less attractive,” but investors including pension funds and insurance companies are prepared to buy longer-dated debt “at almost negative yields,” he said in a phone interview on July 23.
The Swiss National Bank imposed a limit on the franc at 1.20 per euro in September to protect exporters after it appreciated to a record high of almost parity. Should the currency be allowed to rise, it would boost the return for investors in Swiss bonds. Denmark, whose krone is pegged to the euro, also has negative bond yields, with the two-year rate at minus 0.269 percent.
The franc was at 1.20097 per euro today compared with an average of 1.4856 over the past 10 years.
The central bank’s currency limit is leading to the creation of additional liquidity that is being invested in government bonds, according to Ulrike Rondorf, an economist at Commerzbank AG in Frankfurt. “At some point, probably rather than buying bonds at high negative yields, people would just leave the money in cash. The yields are too low.”
Switzerland has been facing deflation, on an annual basis, since October, with a report on July 6 showing consumer prices fell 1.1 percent in June from a year earlier. While that’s boosted the return of bonds’ fixed payments, analysts predict consumer prices will rise 0.2 percent in the fourth quarter, according to the median of four estimates compiled by Bloomberg.
“Yields are not where they are because of inflation expectations,” said Padhraic Garvey, head of developed markets debt at ING Groep NV in Amsterdam. “We are in extraordinary times and we see extraordinary levels.”
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