From Silicon Valley stocks to US and European government bonds, securities already under severe pressure will lose a key buyer as Switzerland ends its longstanding policy of recycling euros and dollars to foreign markets.
The Swiss National Bank recently carried out a surprise interest rate hike of half a point and, for the first time in years, did not mention the franc’s high valuation in its statement.
The shift is significant and suggests that the SNB will no longer prioritize weakening the currency through FX purchases — a policy that has allowed it to build a reserve stack of nearly $1 trillion.
Unlike most central banks, it recycled these intervention proceeds into world markets rather than keeping them at home, making it a huge stock and bond investor. In recent years, it has been among the top shareholders of companies such as Apple, Amazon and Microsoft.
Any reduction in its purchases or eventual move to sell – a possibility after the bank said it also stands ready to prevent the franc from weakening – risks adding to volatility in already shaky markets.
“The SNB’s move away from its previous approach of keeping the franc weak means it will unwind its large US equity holdings, particularly in FAANGS, which should increase selling pressure on these mega-cap names,” said Kaspar Hense, Senior Portfolio Manager at Bluebay Asset Management, meaning the tech quintet from Facebook (Meta), Apple, Amazon, Netflix and Google.
The SNB had already scaled back FX purchases in recent weeks, as evidenced by the drop in “total sight deposits” at Swiss banks, which are seen as proxies for intervention. Those deposits fell by 1.3 billion francs in the week ended June 17, compared with an increase of 756 million francs a month earlier and an increase of nearly 6 billion francs in early April.
The SNB said it will try to minimize the impact on the market, whether it is maturing existing bonds or actively selling assets, while continuing to focus on overall portfolio liquidity.
With inflation above the SNB’s target, the franc was allowed to rise to a seven-year high against the euro, briefly exceeding one franc per euro in March. It underperformed against the dollar, which has surged on expectations of aggressive monetary tightening by the US Federal Reserve.
The SNB’s recent change of course is not entirely consistent with its shock decision in 2015 to unpeg the franc from the euro exchange rate. But tighter policies and their potential retreat from markets coincides with a deepening market sell-off that has caused global equities to fall 21% this year.
Bond yields have also risen sharply as inflation hit a decade high, prompting steep rate hikes.
“On its own, the impact (of potential asset sales) would have been limited, but it’s occurring in the midst of a sharp repricing and reduced market liquidity, so the effect is likely to be amplified,” said Antoine Bouvet, policy rate strategist at ING.
It is difficult to accurately gauge the impact of a fall in investment as the SNB does not provide a precise breakdown of the assets it holds in each currency.
SNB data shows that at the end of March a quarter of its foreign exchange reserves were in equities.
At the time, the SNB’s US stock portfolio was worth $177 billion, according to US regulatory filings, including $12.4 billion in Apple stock, $9.5 billion in Microsoft stock and $6.4 billion in dollars to Amazon. Other holdings included $1.5 billion in Exxon Mobil and $1.1 billion in Coca Cola.
The SNB also holds 600 billion francs in foreign government bonds, accounting for 64% of foreign exchange reserves, Reuters calculations from SNB data show.
Assuming that bonds account for the same percentage of holdings in each currency as in the total foreign exchange portfolio, Reuters calculations show that around 248 billion are high quality bonds like Germany’s.
“Their activity has been quite large in recent years and we’ve seen central banks increase euro holdings in general and the SNB is one of them,” said BofA strategist Sphia Salim. She predicted pressure on short-dated German bonds.
Not surprisingly, last week’s policy shift sent euro-zone and US bond yields higher.
If the SNB were to reduce bond holdings, it would first stop reinvesting proceeds from maturing bonds, said Lyn Graham-Taylor, senior rate strategist at Rabobank. He estimates that this could mean that the SNB could reduce German government debt by almost 5 billion euros by the end of the year.
In 2023, “you’re going to get these concerns about the SNB’s potential sale of bonds that will be merged with higher issuance next year and the potential for ECB QT,” BofA’s Salim said – indicative of the expectation that that the European Central Bank may start reducing its own balance sheet, a process known as quantitative tightening.