Big winner of European bond rally – SNB

SNB could generate profit and solve ECBs concern over the supply of the bonds.

• Swiss National Bank (SNB) pegged franc against Euro at 1.20 in 2011, at the height of European crisis. Recently it gave up the floor in January 2015, just before ECB announcement of quantitative easing.

• Franc appreciated more than 30% on the day and touched as low as 0.80 against the Euro but has rebound significantly. EUR/CHF is currently trading at 1.072, just down a mere 11% from the floor and the rates seem to be stabilizing.

• At the height of European crisis bond yields across Europe were extremely high. Germany ( 2%+), France ( 3%+), Spain (8%+), Italy (8%+) and after the recent announcement by ECB bond yield are negative across Germany, Finland, France, Slovakia. Ireland, Spain, Italy 10 year yields are close to 1%. That is a massive rally in bond prices and sure to generate profit for SNB even after the revaluation.

• SNB currently has foreign reserves worth of $537 billion in foreign currency reserve that could see reduction as it gradually reduces the exposure in Europe with a considerable profit.

• As per the latest data available from SNB, portfolio concentration is high on securities from Germany, France, Netherlands and Austria. These would further boost the profit, should SNB resort to sell the securities.

Probabilities -

• Selling the European securities would put downward pressure on EUR/CHF and it might go down if no measure is taken by SNB to weaken franc.

• SNB could further lower the rates into negative territory to push EUR/CHF higher, which would even be better for overall profits.