German bond yields hit record lows on Friday while fears about Greek banks sent the country’s borrowing costs spiralling – signs of the fallout from the Swiss National Bank’s shock decision to scrap its currency cap.
A surge in the Swiss franc after the SNB abandoned its 1.20 euro limit on Thursday saw investors flee equities and other risky assets, parking money instead in top-rated bonds.
Triple-A rated German debt was again the major beneficiary with 10-year yields falling below 0.40 percent as Swiss equivalents went negative for the first time.
Other core euro zone bonds, U.S. Treasuries and Gilts also made sizable gains, while most lower-rated euro zone government bonds managed to weather the storm as bets firmed that the European Central Bank would ease monetary conditions via quantitative easing next week.
But Greek yields shot higher after two Greek banks applied for emergency funding, with analysts citing Swiss franc-denominated mortgages as a factor.
“The SNB’s shock decision … has triggered a wave of repricings,” said Commerzbank analyst Markus Koch, adding that the uncertainty should remain positive for Bunds.
As Switzerland became the first developed economy to see 10-year borrowing costs fall below zero, market watchers said investors had started to swap their Swiss holdings for higher-yielding alternatives.
Yields on 10-year Dutch, Finnish and Austrian bonds declined to new record lows on Friday, as did Belgium and French equivalents after a brief sell-off on Thursday.
Market experts said the SNB has tended to buy «semi-core» French and Belgium bonds as part of an initiative to protect its currency cap, raising speculation that its demand for this debt would now waver.
Elsewhere, Greek 10-year yields shot up 50 bps to 9.62 percent, with traders citing a decision by Eurobank and Alpha Bank to apply for emergency liquidity assistance from the Greece’s central bank. Three-year yields were up 156 bps at 11.90 percent.
Maria Kanellopoulou at Euroxx Securities was among a number of analysts saying that the surge in the Swiss currency may make it more difficult for many Greeks to make repayments on franc-denominated mortgages. Eleven percent of Eurobank’s group loans are in Swiss francs, according to Euroxx, while they account for around 2-4 percent at other Greek banks.
Eurobank said its funding request was a precaution while Alpha Bank declined to comment.
In the periphery, Italian 10-year yields briefly touched a new record low of 1.70 percent, while Spanish equivalents were flat at 1.58 percent.
The view among traders was that the SNB abandoned its currency cap because it could not hold out against the tide of money coming its way from the ECB stimulus.
A Reuters poll of economists on Thursday showed there was a 90 percent chance the ECB conducts QE, and a 70 percent chance it is delivered this month.
Benoit Coeure, one of the ECB’s top policymakers, said on Friday the aim of QE could be to anchor long-term financing conditions and restore confidence in the bloc’s inflation target.
While the ECB won crucial backing for these plans earlier this week from a top European Union legal adviser, the head of Germany’s central bank stressed on Thursday that any scheme would have legal limits.