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):
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.
While negative yields on shorter duration bonds do not appear to have much of a relationship with changes in prices of their respective CDSs…
More often than not, when yields on the 10-year benchmark bond have dropped below zero (shaded regions), CDS (of any duration) have surged:
