The Swiss 10-Year Bond Illustrates Central Banks` Flawed Monetary Policy

Negative 15 Basis Points

Switzerland’s 10-Year Bond Yield is now negative 15 basis points, yeah that`s right we don’t even have to bring up the notion of inflation and real rates of return, the actual 10 year bond for Switzerland is charging investors 15 basis points for the privilege of buying Swiss debt, and you thought CD rates were bad.  

A whole lot of Inflation can happen in 10 years!

This isn`t some safe haven bond for 30 days or even 3 months, but a duration of 10 long years. The Swiss National Bank has mastered the art of Tom Sawyer getting paid by others for ‘the privilege’ of painting his fence. 

Energy Deflation Mirage

Swiss consumer prices did drop 0.3 percent year-on-year in December of 2014 following a 0.1 percent fall in November, due mainly to the drop in energy costs. But this is hardly a deflationary death spiral where consumers in Switzerland are going to delay purchasing goods that they utilize every year because these same goods are going to be much cheaper in the future. Looking at the gasoline and heating oil charts the last 2 weeks I am sure everyone wishes they stocked up on these cheap goods heading into the heart of the winter storms and gasoline formulation change-over season.

Bad year over year Energy Comps will roll out of the Data Set

The point is the energy comps late in the year are transitory, they come out of the year over year numbers as each expensive comp gets replaced by a cheaper comp, so what appears to be dire deflation in Europe, isn’t near as ‘dire’ as the numbers indicted towards the end of the year, and the first half of 2015 as the energy comps are just bad right now. But guess what if energy takes off 2 years from now, or 5 years from now the comps are going to explode higher, and Europe will be talking about an inflation problem. 

No Need for Bond Vigilantes – Simple Reversion to Historical Mean

The problem I have with dysfunctional Central Bank Policies is the absurdity of a broken bond market, a bubble so big that it cannot possibly sustain itself, the higher bond prices go, and the lower bond yields go, the deeper and more extreme the massive reversion to the historical mean or just ‘long squeeze’ that occurs causing major market instability to not only the bond market, but every single market in the entire financial system because all markets in a sense price themselves and revolve around what the bond market does.