SNB hits back at S&P bond-buying report - FT.com
Last updated: September 25, 2012 6:20 pm

SNB hits back at S&P bond-buying report
By Ralph Atkins and Alice Ross in

However, in a statement late on Tuesday, the SNB said the report contained a “fundamental error”.

“[The report] ignores the sizeable increase of SNB deposits with other central banks and international institutions which are published monthly by the SNB,” the central bank said.

“The conclusion by S&P that the Swiss National Bank has bought about €80bn of government bonds of core eurozone countries is unfounded.”

The SNB said a figure used by S&P to calculate the amount of holdings in German and French government debt ignored the fact that part of that figure included cash still held with other central banks, including the European Central Bank.

The SNB declined to say how much it currently held in German and French government debt. In response to the S&P report, economists at Credit Suisse estimated the amount of core eurozone debt bought this year was closer to €30-35bn.

Widening yield “spreads” – or interest rate differentials – between German bonds and those of crisis-hit eurozone periphery countries such as Spain and Italy have highlighted investors’ fears about a eurozone break-up.

But the S&P report indicated bond markets were exaggerating those concerns.

“I don’t want to belittle the concerns of investors but they may have been exacerbated by the way that the SNB has come in buying core sovereign bonds,” said Moritz Krämer, S&P’s head of European sovereign ratings. Last night S&P said it stood by its conclusions.

French government bond yields rose sharply last year amid fears about France’s public finances and worries about “contagion” effects from the eurozone debt crisis.

But in May this year, the French 10-year bond yield dropped sharply from just under 3 per cent to 2.35 per cent even as the value of the euro was tumbling amid worries Greece would quit the eurozone.

One banker familiar with the SNB’s portfolio said the Swiss central bank had been “largely responsible for the mispricing in French debt” ahead of a cut in European Central Bank interest rates in July.

Ten-year French bonds were trading at a yield of 2.3 per cent on Tuesday and their German 10-year equivalent at 1.6 per cent.

Paris has drawn comfort from the recent declines, which suggested financial markets were giving the benefit of the doubt to the fiscal policies of François Hollande, Socialist victor in May’s French presidential election.

In suggesting the fall was also the side-effect of aggressive SNB action to cap the appreciation of the Swiss franc against the euro, S&P’s estimates were based on analysing the central bank’s stated asset allocation guidelines.

According to the most recent available data to the end of June, the SNB holds 85 per cent of its reserves in government bonds and 60 per cent in euros. In August, the central bank held a record SFr418bn in forex reserves.

The €80bn in estimated SNB purchases of “core” eurozone countries’ sovereign debt was equivalent to almost half of the 2012 forecast combined full-year fiscal deficits for the bloc, which comprises the Netherlands, Finland and Austria as well as France and Germany.