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Categorized | Banks, Capital Markets, Currencies

Swiss boost holdings of UK debt

Posted on October 31, 2012

Switzerland has emerged as one of the biggest overseas buyers of UK government debt as it seeks to offload a huge stockpile of euro accumulated during its push to weaken the Swiss franc.

The Swiss National Bank more than doubled its holdings of sterling in the third quarter of the year in an effort to reduce its exposure to the eurozone, cutting its euro reserves from 60 to 48 per cent and increasing sterling reserves from £8bn to £18.9bn.

    Analysts at UBS and Nomura estimated that the SNB had been responsible for two-thirds of total gilt purchases by non-UK residents in the third quarter of the year, buying £10bn-11bn out of an estimated £17bn in total. Overseas investors own nearly a third of the UK government bond market.

    “This is a huge number. It will definitely have pushed gilt yields lower than they otherwise would have been,” said Geoffrey Kendrick, foreign currency analyst at Nomura. Ten-year gilt yields ended the third quarter flat at 1.73 per cent and have since climbed to 1.84 per cent.

    Switzerland has built up record levels of foreign currency reserves this year as a direct consequence of its policy of keeping the franc at SFr1.20 against the euro, which has been in place since September last year. Switzerland is now the fifth largest reserve manager in the world, behind China, Japan, Saudi Arabia and Russia.

    The central bank started buying tens of billions of euros a month in May, when the eurozone crisis worsened and foreign investors rushed to buy the Swiss franc as a haven asset. But the improved sentiment towards the eurozone in recent months has eased the pressure on the franc, giving the Swiss central bank time to diversify its holdings.

    Other currencies including the Canadian dollar and the Australian dollar have also seen heavy inflows from the Swiss National Bank as it has recycled its euros.

    Central bankers have taken note of Switzerland’s activity in the foreign exchange market this year. The governor of the Reserve Bank of Australia in August expressed surprise that a “conservative institution” like the SNB would be interested in the Australian dollar. Holdings of so-called “other” currencies by the SNB, which include the Australian dollar, rose to record proportions in the third quarter of the year at 4.1 per cent.

    Switzerland’s ballooning reserves have sparked concerns among analysts. A report by Standard & Poor’s in September warned that Swiss buying of core eurozone government bonds had caused price distortions, sparking an unusual rebuttal from the SNB.