Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 21 January 2015 at 14:30 GMT

Negative yields: The definition of insanity

Chief Investment Officer / ACIES Asset Management
  • The peg was bold, costly and ultimately futile
  • Switzerland has never been a high-yield place
  • Buy a Swiss 10-year now, pay –0.19% in a decade
By Andreas Clenow

Albert Einstein is rumoured to have said that the definition of insanity is to do the same thing over and over again, expecting different results. The definition of irony, meanwhile, could be that writers such as myself keep repeating this hackneyed quote, expecting interested reactions. In the financial world however, there's clearly a more novel definition of insanity; negative yields.

How much would you want to get paid to lend out money for ten years to the Swiss government? It would have to be considered quite a safe investment, so understandably you won't get paid much. But would you be ready to pay the Swiss for the privilege of holding your hard earned cash? 

Switzerland has had extremely low interest rates for quite some time. That in itself is not news. It's also well known that the country has struggled with a far too strong currency. A few years ago, the currency problem was solved by a man locally nicknamed the John Wayne of central bankers by setting a floor of 1.20 against the Euro, and thereby effectively pegging the currency. It was a bold move and a very expensive one. As it turned out last week, it was also a futile move.

As the Swiss National Bank lost the battle of its currency last week, a completely new situation arose. The first round of insanity involved a 30% intraday move in the Swiss Franc. This move wiped out a large number of forex day traders, a few hedge fund and some brokerage shops. This move is crazy by itself, but shock moves like this happen. Half of the move was later recovered. No, the real insanity is what happened after. 

Switzerland has never been a high yield nation. Look at the chart below first, to put things into perspective. What you see below is the yield on the Swiss Confederation 10-year benchmark bond. In short, this is the percentage you'll get paid for lending out money to the government for ten years.

Monthly Swiss 10-year benchmark bond yield

Source: ThomsonReuters

Yes, I removed this month's values on purpose. Up until last month, yields were low, but still within the realm of sanity. Below you'll find the daily chart, including the very last updates. See that empty area around 0? That's the demarcation line. The realm of sanity lays to the north. 

Daily Swiss 10 year benchmark bond yield

Source: ThomsonReuters

Let's be clear at what you're looking at. This is not the futures contract. Oh, that went nuts too, but futures contracts are allowed to go nuts as long as they fall in line before expiry. The 3-month EuroSwiss future has indicated negative in the past, but never settled above 100.

No, what you're looking at is actual bond sales. People are at the moment paying the Swiss to hold their money for ten years. If you buy Swiss bonds for 10 million here, you'll have a yield to maturity of around -0.15%. I believe this deserves to be the new definition of insanity.

Incidentally, if anyone would like to lend me money at negative rates, the TradingFloor editors have my contact details.

Some things, such as negative yields, are just plain crazy.  Photo: Owen JC Smith

– Edited by Clare MacCarthy

Andreas Clenow is principal of ACIES Asset Management. Follow Andreas or comment below to engage with Saxo Bank's social trading platform.
benlouro benlouro
crazy world. this will end up in tears....


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