After 15 years, the Swiss National Bank decided to rise its interest rate yesterday by 50BPS to -0.25%. Because of the appreciation of CHF, the Swiss National Bank has the luxury of keeping the rates in negative territory. This appreciation is mainly due to massive monetary stimulus by Fed and currency creation in the American banking system (not by demand). When this currency war started, Every developed countries’ Central banks started to print their local currency and buy US treasury bonds in order to keep the exchange rate favorable for exporting goods (not so smart), but SNB printed CHF, exchanged it for USD cash, depreciated the CHF, and bought US Equities. In a simple term, SNB made it clear to Fed that if they were forced to participate in a currency war, it is not going to be in favor of the US.

It is my currency, your war, your equities, your problem.


Now that every investor has no choice but to sell their US bonds and push the yields higher, SNB owns pieces of the US economy. This need for dollars and liquidity means that any bond that reaches its maturity will not be reinvested again, putting pressure on the federal government’s budget.

In order words, the Federal Reserve has to step in and monetize the Us government’s debt to keep it functioning which is not different from printing money and expanding its balance sheet.

In this scenario, while the price of bonds will continue to drop, stocks will stay up and might absorb some of that newly created liquidity. This is the main advantage of SNB over other CBs like BOJ.

The recent rate hike by SNB indicates two strong messages to the market:

  • They will proactively react to any inflation expectation and won’t let it runoff as the Fed did.
  • If they have to tighten, They will start to sell US equities and keep the bonds to their maturity, instead of selling them for a cheaper quote.

This is a smart move since they will be able to buy back those stocks when their bonds mature even for a more favorable price tag.

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