News conference
Zurich, 17 December 2020
Andréa M. Maechler
Introductory remarks by Andréa M. Maechler
I will touch on two areas in my remarks today: First, I will review developments on the
financial markets over the last half-year; here I will comment briefly on our foreign exchange
market interventions in 2020. Then I will speak about the imminent changeover from Swiss
franc Libor to SARON.
Situation on the financial markets
Investor risk sentiment has been extremely volatile since our last news conference in June,
mainly due to developments surrounding the coronavirus pandemic. Over the summer
months, economic activity and investor sentiment recovered following the relaxation of the
containment measures introduced during the first wave of infections. In the autumn, the
second wave of infections dampened investor confidence again, especially in Europe. Then, in
November, news that coronavirus vaccines might soon become available caused market
sentiment to return to a positive footing. In addition, various political risks, such as the Brexit
negotiations and the US presidential elections, influenced risk sentiment.
Monetary and fiscal policy on both sides of the Atlantic also played an important role in
market developments. Having taken extensive measures to stabilise the markets in the wake
of the turbulence in March, the US Federal Reserve (Fed) and the European Central Bank
(ECB) have since confirmed the expansionary stance of their respective monetary policies.
The ECB recently eased its monetary policy further by, among other things, increasing the
size of its bond-buying programme. Moreover, market participants interpreted the Fed's
revision of its monetary policy strategy as an indication that the Fed will continue pursuing an
expansionary monetary policy for an extended period. This, along with expectations of a
major fiscal stimulus package, supported investor risk sentiment and caused inflation
expectations in the US to rise. What is more, in Europe, the agreement reached in July on the
creation of an EU recovery fund led to a further decline in risk premia on sovereign bonds.
Overall, risk markets were able to benefit for considerable periods of time, despite the volatile
market environment. There was some divergence between the US and Europe, however:
While the leading US equity index, the S&P500, hit a new record high as early as the
beginning of September driven by technology stocks, price developments on the major
European stock markets were more moderate. Thanks to the rally in November, all major
indices are up on mid-year. According to the latest reading, Switzerland's SMI is up around
3% (cf. chart 1).
On the interest rate markets, yields on long-term government bonds continued to reflect
expectations of an ongoing low interest rate environment. Although yields on US Treasuries
did trend upwards slightly overall in the second half of the year, 10-year US Treasuries
continued to trade at historically low levels - around 0.9% according to the latest figures -
following the marked drop in interest rates at the beginning of the year. The yield on 10-year
German government bonds continued to decline from mid-year under the influence of the
ECB's bond purchases. A moderate decline in yields was also observed in Switzerland. For
example, the latest reading shows the yield on 10-year Confederation bonds just below the
mid-year values, at around -0.6% (cf. chart 2).
On the foreign exchange markets, the persistent downtrend of the US dollar has been the
dominant theme in recent months. On a trade-weighted basis, the dollar has depreciated by
over 7% since the end of June. Against the backdrop of predominantly positive risk sentiment,
the dollar was less in demand as a safe-haven currency. The rise in inflation expectations in
the US is also likely to have contributed to the depreciation of the dollar. The euro, by
contrast, has appreciated by almost 3% on a trade-weighted basis since mid-year. It
strengthened in particular following the announcement of the EU recovery fund, which
market participants interpreted as a sign of stronger fiscal cohesion within the euro area.
Trading in the pound sterling has been volatile over recent months in light of the ongoing
Brexit negotiations; the currency has appreciated over 2% on a trade-weighted basis since
mid-year.
The Swiss franc trended mainly sideways on a trade-weighted basis during the summer
months, before coming under renewed appreciation pressure in the autumn due to the second
coronavirus wave and heightened uncertainty ahead of the US elections. The Swiss franc only
weakened again recently with the prospect of a COVID-19 vaccine and hopes of a faster
recovery of the global economy. On a trade-weighted basis, the Swiss franc is almost 1.5%
stronger in nominal terms than at the end of June (cf. chart 3). It thus remains highly valued.
As reported in our interim results, we carried out foreign exchange market interventions
totalling CHF 90 billion in the first half of this year. On a trade-weighted basis, the Swiss
franc has strengthened some 5% in real terms since the beginning of 2020. Had we not
intervened, the franc would have appreciated significantly more, and this would have placed
an additional burden on our economy in an already exceptionally challenging environment.
Let me now say a few words about the changeover from Swiss franc Libor to SARON. The
end of Swiss franc Libor is fast approaching. In November, the Libor administrator launched
a consultation procedure on the discontinuation of Swiss franc Libor as per end-2021. Market
participants in Switzerland may therefore only have around 12 months to complete the
necessary work for a smooth transition to SARON. Only the heavily used tenors of US Libor
are expected to be granted an extension until mid-2023. However, this will not affect the
Swiss franc Libor I have been focusing on in my remarks.
In order to ensure an orderly transition, it is vital that the changeover to SARON on the credit
and derivatives markets occur as early as possible. The supply of SARON-based products on
the credit market is increasing. For example, various banks have launched SARON-based
mortgages in recent months.
However, the SARON-based derivatives market is still significantly less liquid than its
Liborbased counterpart - turnover on the SARON-based derivatives market remains considerably
lower than turnover on the Libor-based market (cf. chart 4). As we do not have a consistently
liquid government bond curve in Switzerland, the interest rate swap curve is very important as
a reference for pricing fixed-interest loans and bonds. With the discontinuation of Swiss franc
Libor, this critical reference function will be performed by the SARON-based interest rate
swap curve.
It is important that Libor-based contracts that cannot be switched to SARON before the end of
2021 are furnished with robust fallback clauses. The International Swaps and Derivatives
Association (ISDA) has recently published such fallback clauses for derivatives contracts.
Robust fallback clauses minimise the risks associated with the discontinuation of Swiss franc
Libor, thereby providing a safety net.
The SNB itself continues to make progress with the changeover to SARON - we will have no
outstanding Libor-based derivatives in our investment portfolio by the end of 2021.
Moreover, from end-2021, we will exclude all Libor-based floating-rate notes from the list of
collateral eligible for SNB repos when implementing monetary policy. These steps will cut
any remaining ties between the SNB's monetary and investment policy and Libor.
Zurich, 17 December 2020
Andréa M. Maechler
News conference
Charts
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Zurich, 17 December 2020
Andréa M. Maechler
News conference