Swiss Anomaly: Still Negative Nominal Rates?

A dominant meme in the foreign exchange market is that the world has taken an important step away from the edge of the abyss.  It may have been led by three words from ECB's Draghi (as in "whatever it takes"), but has been complimented by a number of other steps, including the IMF mea culpa for under-estimated the fiscal multiplier, signals that the EU will give some countries, including Spain and France more time to reach the deficit targets, and a modification and delay in implementing the new Basel capital requirements.  

Sentiment has improved.  No longer are the naysayers talking about Greece leaving EMU.  Equity markets have rallied.  Core bond yields have risen and peripheral bond yields have fallen.  Of note, the Greece's 10-year yield has slipped below 10%.  Ireland has returned to the capital markets and Portugal is trying to as well.

The previous safe haven currencies, like the yen and Swiss franc have weakened as short-term capital gets reallocated to assets with higher risk reward features.  It seems a bit ironic that Japanese official rhetoric has drawn more criticism than the Switzerland's decision to cap the franc's appreciation though large scale intervention that dominated reserve accumulation in Q2 and Q3 last year.  It appears that the SNB did not intervene in Q4 12 and it is expected to report the allocation of its reserve holdings this week.  

One apparent anomaly is that the Swiss 2-year note still offers a negative yield.  This is surprising given stronger appetite for risk and the weakness of the franc.  That said, Japanese 2-10 year yields have not reacted much to the weakness of the yen either.  In Switzerland's case, though, things are not quite what they seem.  The on-the run 2-year Swiss bond (maturing Nov 2014) does have a negative yield of almost 8 bp, but the generic yield is + 4 bp., suggesting this is an instrument specific anomaly.  The generic 2-year yield has risen from -22 bp at the end of last year. 

The euro tested the CHF1.25 level yesterday and reversed lower.  There is follow through euro selling against the franc today.  A break of CHF1.2400 signals a test on last week's low near CHF1.2325.  The US dollar has been turned back from the CHF0.9400 area near the middle of the month and today is at its weakest level since Jan14.  Mild trend line support is near CHF0.9160.