Kames Capital’s Roberts takes an outsider’s view of SNB

David Roberts, joint head of fixed income at Kames Capital, says there is much to read into recent activity by the Swiss National Bank.

As someone who lives and works in the UK, managing bonds for a living, it is intriguing to view the current actions of the Swiss National Bank (SNB) and the attention those actions are attracting from both ends of the political spectrum.

In my home market, the Bank of England has been under pressure to explain the benefits of quantitative easing. Under this programme it is buying £375bn UK government bonds. Having initially said that quantifying the value of these purchases to the economy was difficult, the Bank has since taken every opportunity to assure the public that British growth has been supported by the programme. Whether or not there has been any impact on the British currency is debatable. However, as a stable economy where the central bank acts to support bonds, the UK has seen significant purchasing of government debt by foreign investors (the SNB included). In my opinion this has boosted the value of sterling – as we know a prime reason for central bank purchases is to diversify foreign exchange reserves, hence wealth funds and central banks will buy sterling to fund their gilt purchases, but not swap out the currency risk.

What does all this have to do with Switzerland? While the Bank of England may have a view on currency, direct intervention in foreign exchange markets has not been a policy in recent years. As we know, the SNB has felt the best way to preserve the domestic economy is to prevent the Swiss franc appreciating, in particular against the euro.

Of course what this has led to is European quantitative easing, sponsored by the Swiss – the SNB simply takes some Swiss francs, swaps them for euros and uses the proceeds to buy bunds, thus pushing the yield on German debt lower than it should be. According to some commentators the SNB now owns more than 10% of all bunds that are currently in issue. Indeed Swiss foreign exchange reserves have grown at such a pace that they are now estimated to be in excess of 70% of GDP.

Naturally, philosophical as well as economic and political questions are raised when one central bank interferes in the affairs of another. The European Central Bank does not appear to care, indeed given the effort being made by Mr Draghi to pull yields down in peripheral bond markets, he would dearly love to see the SNB ‘intervene’ in Spain and Italy!

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