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Swiss bond market approaching turning point
28 October 2011
Senior UBS economist warns the yield curve is set to steepen
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Swiss Switzerland
The strong performance of the Swiss economy may be set to cause an unexpected shift to the country’s yield curve, as expectations catch up with reality.
Reto Hünerwadel, senior economist at UBS, said: “The Swiss economy has continuously surprised on the upside and the market is looking for even lower inflation than has materialised. People have continuously underestimated the Swiss economy.”
Hünerwadel, speaking at Global Investor/ISF Swiss Securities Finance and Liquidity Management Forum yesterday, said the Swiss Central bank has maintained a policy of “cautious estimation” on growth leading to a lax monetary policy. It has led the market to hold “absolutely no interest rate hike expectations.”
The Federal Statistics Office reported earlier this month that consumer prices increased 0.3% in September, well ahead of the consensus 0.1% estimate. Annual GDP growth to the end of the second quarter was 2.3%.
The relative success of the Swiss economy combined with low interest rates may now be set to feed into inflation expectations. This is likely to manifest itself only at the long end of the yield curve as the central bank is “not likely” to increase the base rate, according to Hünerwadel.
He suggests that Swiss households are unprepared for the change and the effect on the Swiss economy “will only be seen in the future”. He says that households typically understand exchange rate risk – the Swiss franc gained more than 50% against the euro since 2008 before falling back recently – but not interest rate risk. Switzerland has the highest ratio of mortgage debt to GDP in the world.
In addition, rising interest rates at the long end would further led to a strengthening of the franc. Hünerwadel suggested that the central bank may decide to combat this in the future by allowing substantially higher inflation.