From Silicon Valley shares to U.S. and European government
bonds, securities that are already under heavy pressure stand to lose a major
buyer as Switzerland ends its long-standing policy of recycling euros and
dollars into foreign markets.
The Swiss National Bank recently delivered a surprise half-point
interest rate hike and for the first time in years omitted references in its
statement to the franc being highly valued.
The shift is a momentous one, suggesting the SNB will no longer prioritise weakening the currency by purchasing foreign
exchange - a policy that enabled it to build a reserve pile of nearly $1
trillion.
Unlike most central banks, it recycled these proceeds of
intervention into world markets rather than holding them at home, making it a
huge stock and bond investor. In recent years it ranked among the top
shareholders in the likes of Apple, Amazon and Microsoft.
Any reduction in its purchases, or an eventual move towards
selling - a possibility after the bank said it is also ready to check a weakening
of the franc - risks heightening volatility on already shaky markets.
"The SNB's departure from its previous approach to keep the
franc weak means they will unwind their large U.S. stock holdings, particularly
in FAANGS, which should increase selling pressure on these mega-cap
names," said Kaspar Hense,
senior portfolio manager at Bluebay Asset Management,
referring to the tech quintet of Facebook (Meta), Apple, Amazon, Netflix and
Google.
The SNB had already cut back forex buying in recent weeks, as
evidenced by a drop in "total sight deposits" at Swiss banks that are
seen as a proxy for intervention. These deposits declined by 1.3 billion Swiss
francs in the week ending June 17, versus a rise of 756 million francs a month
earlier and an increase of nearly 6 billion francs in early April.
The SNB said it would seek to minimise
the market impact whether it were to let existing bonds expire or actively sell
assets, with the focus remaining on the overall liquidity of the portfolio.
With inflation above the SNB's target, the franc has been
allowed to rise to seven-year highs against the euro, briefly pushing beyond
one franc per euro in March. It has performed less well against the dollar,
which has soared on expectations of aggressive policy tightening by the U.S.
Federal Reserve.
The SNB's recent policy shift is not quite on a par with its
shock decision in 2015 to ditch the franc's euro exchange rate peg. But tighter
policy and its potential step back from markets coincides with a deepening
market selloff that has sent global stocks to a 21% loss this year.
Bond yields have also surged as inflation hits multi-decade
highs, prompting steep rate hikes.
"In isolation, the impact (of potential asset sales) would
have been limited but it comes in the middle of a sharp re-pricing and lower
market liquidity so the effect will likely be magnified," said ING senior
rates strategist Antoine Bouvet.
It is difficult to gauge accurately the impact of any investment
pullback, as the SNB does not provide a breakdown of exactly which assets it
holds in each currency.
SNB data does show that a quarter of its FX reserves were in
equities as of end-March.
At that time, U.S. regulatory filings show the SNB's U.S. equity
portfolio was worth $177 billion, including $12.4 billion in Apple shares, $9.5
billion in Microsoft and $6.4 billion in 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, making up 64% of FX reserves, according to Reuters calculations from SNB
data.
Assuming bonds make up the same share of holdings in each
currency as they do across its entire FX portfolio, Reuters calculations show
that might include some $248 billion of U.S. Treasuries and 221 billion euros
of euro zone government debt - most of it likely to be in top-rated bonds like
Germany's.
"Their activities have been quite large over the last few
years, and we did see in general increased euro holdings by central banks, and
the SNB is one of them," BofA strategist Sphia Salim said. She predicted pressure on short-dated
German bonds.
Unsurprisingly, last week's policy pivot sent euro zone and U.S.
bond yields surging.
If the SNB were to wind down bond holdings, it would first stop
reinvesting the proceeds of maturing bonds, Lyn Graham-Taylor, senior rates
strategist at Rabobank said. That could see the SNB
drop nearly 5 billion euros of German government debt by year-end, he
estimates.
In 2023, "you'll get those concerns around the SNB
potentially selling bonds, merged with higher issuance next year and the
potential for ECB QT," BofA's Salim said - a
reference to expectations the European Central Bank may eventually start
reducing its own balance sheet, a process known as Quantitative Tightening.