Ignore the SNB’s huge stonking losses 

 May 2, 2022

Mirik Chapman is the CEO of Hedge Analytics and a former portfolio manager at Elliot Management and a bond strategist at UBS.

The National Bank of Switzerland has long been unafraid of exactly how it is allocating it A huge million dollar store Of foreign exchange reserves. But the last few months have undoubtedly been difficult.

The returns on its stock investments are probably terrible, but the losses on bonds are probably even worse. From the Swiss Sovereign wealth fund Of the central bank Self-collapse Of asset types and currencies, and Form 13F to file for its U.S. stock portfolio, I estimate its losses so far this year could reach around $ 75 billion ($ 78 billion), or about 10 percent of Switzerland’s GDP.

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Even so, owning one is still beyond the reach of the average person.

Some background on how it all happened. The SNB’s policy was radically different from that of central banks elsewhere, although its approach led to the same explosive growth in the balance sheet.

The expansion has been amazing. Before Lehman’s bankruptcy and the so-called eurozone sovereign debt crisis that followed, the SNB’s reserves stood at only Sfr 80 billion. Today, the foreign exchange reserves of the Swiss central bank amount to just over Sfr1tn, or $ 1.04tn.

Central banks such as the Federal Reserve, the European Central Bank, the Bank of Japan or the Bank of England have acquired assets to increase liquidity in their economies. These purchases were financed by issuing new money, which in turn was credited to the banking system as reserves.

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In contrast, the 12-fold increase in SNB reserves is a result of his struggle with the manic appreciation of the Swiss franc. Swiss investors returning home and foreigners seeking refuge from the eurozone mess pushed the currency that many saw as the ultimate “safe haven”. A distinctly Swiss version of quantitative easing was born; Newly formed Swiss francs were sold to those who cared for them, and the proceeds were used to buy foreign assets.

The SNB’s first choice was to buy European bonds. But when demand for Swiss francs went crazy, the SNB was forced to look further, buying bonds and stocks in the US and elsewhere. Foreign demand for Swiss currency was thus converted into SNB assets.

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Did it make Switzerland richer? Yeah, a little bit, that’s part of the story after. For the most part, the flow of deposits created a commitment that SNB policy was intended to offset assets abroad. The goal was to prevent the franc from rising further, not to make money.

The SNB continued to buy foreign assets throughout the first quarter, and may buy more if pressure on its currency continues. The central bank’s automatic deposits – a key measure of demand for Swiss francs – rose again after the invasion of Ukraine as demand for the Swiss currency rose, briefly raising the franc to par with the euro in early March, and further purchases are possible.

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At his meeting that month the SNB said (Our highlight below):

The SNB maintains its expansionary monetary policy. It maintains SNB policy and interest rates on current SNB deposits of -0.75% and Willing to intervene in the foreign exchange market as needed, in order to deal with upward pressure on the Swiss franc. In doing so, it takes into account the overall currency situation and the inflation gap with other countries. The Swiss franc remains of high value. Russia’s invasion of Ukraine has led to a sharp rise in uncertainty around the world. Against this background, the SNB with its monetary policy ensures price stability and supports the Swiss economy.

Acquisition of foreign assets therefore appears to remain a policy priority for the SNB for the foreseeable future. After all, by and large, the policy worked.

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However, the SNB made money because the assets they bought increased in value. In fact it did a court Of money.

If bond prices fall in the second quarter of 2022 as in the first quarter, the SNB will have an uncomfortable first half year, with losses in the region of Sfr 120 billion (16% of GDP) possible if stocks fail. recover.

The reality, however, is that the SNB of Longer-term gains The stock market far outweighs the losses in bonds and the meager returns offered to depositors in Switzerland. While central banks like the BoE and the Reserve Bank of Australia may be required to admit large losses in their QE portfolios, the SNB probably sits nicely.

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I estimate that its investment profit was about $ 90 billion by the end of 2021. Acquisitions have since spoiled things a bit, but apparently they maintain a profit of about $ 65 billion. This huge profit is a big pillow, and the reserves themselves were created from the thin Swiss air.

After all, the SNB was legally limited to paying a maximum dividend of 6 percent, so it could not easily give away its profits. Instead, it has increased its provisions in line with its assets since 2010. This marks the SNB outside other central banks, which carry relatively thin provisions that may erode quickly with the development of ‘quantitative tightening’. The overall math of the deals seems reasonable.

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In addition, the logic of the markets seems to favor the SNB. Losses on bonds and stocks are usually associated with an increase in the dollar, which while hurting their foreign exchange reserves shows that the overall strategy may work, at least to some extent, in both directions. As the Swiss franc increases, their reserve assets increase in value, and when their reserve assets decrease, the Swiss franc becomes its undesirable addition.

Thus, the SNB will not lose much sleep because of their losses. Turns out it’s good to be loved by investors.

Ignore the SNB’s huge stonking losses Source link Ignore the SNB’s huge stonking losses

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