Bonds News

UPDATE 1-Switzerland sells 10-year bonds at negative yield as deflation fears deepen

ZURICH/LONDON, April 8 (Reuters) - Switzerland auctioned 10-year government bonds with a negative yield on Wednesday, in what some banks said was the first time a government has effectively made investors pay for the privilege of lending to it for such a long period.

Ultra-low interest rates have helped drag bond yields down right across the developed world but investors have continued to snap up debt on growing fears of deflation.

The Swiss Federal Treasury said it sold 232.501 million Swiss francs ($242 million) of bonds maturing in July 2025 at a yield of -0.055 percent. The bonds carry a 1.5 percent interest rate.

At the last auction of the bonds, in February, they sold at a then record low yield of 0.011 percent.

A third of euro zone government debt now carries negative yields, and the process has accelerated since the European Central Bank last month launched a scheme to buy 1 trillion euros of bonds to spark growth and inflation.

Euro zone benchmark German debt trades in the secondary market with negative yields on maturities of up to seven years. Berlin has also sold two- and five-year bonds at auction with negative yields. But never 10-year bonds.

On the Swiss secondary market all government bond yields out to 11 years maturity are now in the minus column, while Swedish and Danish debt carries negative yields out to about five years.

Switzerland’s situation is all the more remarkable given that not even the yield on 10-year Japanese government bonds have ever gone negative during the country’s long battle against deflation since the 1990s.

The Swiss National Bank shocked markets in January by scrapping its cap on the franc’s value against the euro, leading to a surge in the Swiss currency that could also contribute to a slide into deflation. It partially offset the move by cutting the interest rate on certain sight deposit account balances by 0.5 percentage points to -0.75 percent.

Although the franc has since slipped back, it is still around 15 percent stronger than it was before the SNB move, piling more deflationary pressure on the economy and depressing bond yields. ($1 = 0.9608 Swiss francs) (Reporting by Nigel Stephenson and Jamie McGeever in London, Alice Baghdjian and Ruppert Pretterklieber in Zurich.; Writing by Nigel Stephenson and Jamie McGeever; Editing by Hugh Lawson)