Switzerland’s Negative Rates and Rising CDS [CHARTS]

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Short-term European government bond yields have been negative for some time now, with Swiss bonds leading the charge.  Switzerland is, however, the only country for which yields are negative all the way out to the ten-year duration mark.

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Besides investors’ flight to ‘safety’ in light of heightened uncertainty in its European neighbors, Switzerland also has a negative policy rate (in response to deflationary trends) and a stronger currency– especially since the decision to stop dampening any appreciation against the euro earlier this year):

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All of this is to say that investors seem pretty comfortable holding an investment on which they will likely lose (less) money… or are they?  A look at the month-over-month change in 10-year credit default swaps reveals a 25-35% rise so far this month in the cost of insurance one might purchase to protect against the possibility of default on a Swiss bond.

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While negative yields on shorter duration bonds do not appear to have much of a relationship with changes in prices of their respective CDSs…

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More often than not, when yields on the 10-year benchmark bond have dropped below zero (shaded regions), CDS (of any duration) have surged:

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