Bond Focus : To Kill The Fatted Calf
Gone are concerns on oil prices and the topic of discussion is now on the Swiss National Bank and their very abrupt decision to remove the Swiss Franc’s peg to the Euro currency last Thursday, which roiled markets, with repercussions that will reverberate through the markets for the months to come.
The immediate casualties are the Forex trading operations, with some brokers declaring insolvency and banks hit by major losses. Yet, this may represent just the tip of the iceberg as the CHF-funded mortgages around the world reel from the effects of this unexpected change of heart that challenges the very spirit of forward guidance from central banks we have grown used to.
CHF/SEK was Goldman Sach’s top 6 recommendations for 2015 and the game is over even before the first fortnight.
I see markets running scared, sovereign yields going down the drain and Swiss 10Y bond futures (at coupon 6%) at 166.77, which is a premium of 67% over 100, and at a negative yield.
Should we live with that?
Taking a look at the table of global bond yields, we note that most of the sovereigns are giving practically no yield at all which means that the bond returns must have been fantastic just on price appreciation in the past year i.e. who cares if Swiss 10Y bonds are giving -0.13% yield when the price has appreciated 10%?