At the same time, the SNB has been active in the foreign exchange market in order to react to increased demand for Swiss francs and prevent a renewed appreciation. This suggests that only a relatively modest portion of the newly acquired currency was invested in Swiss franc  5  Here, we are dealing with the inverse of the effect described in the previous footnote. Seite 5/7  securities. 6 The question therefore arises: in what form were the additional Swiss franc positions built up and held? Swiss franc positions increasingly built up through derivatives Forward foreign exchange contracts have become more and more important in recent years. In principle, investors have two options if they wish to build up Swiss franc positions and thereby reduce their foreign currency risk: either they can sell existing foreign currency assets and acquire assets in Swiss francs instead, or they can continue holding their existing foreign currency assets but hedge the associated currency risk through forward foreign exchange transactions (derivatives). Although both strategies are deployed in practice, the development of customer deposits suggests greater use of hedging transactions. This observation appears to be borne out by the rise in the share of hedged foreign currency assets held by Swiss pension funds. If the SNB increases liquidity in the banking system by purchasing foreign currency against new Swiss francs, this can lead to a rise in customer deposits at commercial banks. From mid2011 to mid-2013, investors increased their Swiss franc positions by forming Swiss franc deposits.
Despite very high demand for Swiss francs, the percentage fell from 21% to 15% between 2008 and 2014; since negative interest was introduced, it has fallen further and now stands at only about 11% (cf. chart 7). Conversely, the share of domestic investors has risen. This group often favours domestic bonds for their long-term investments, or is obliged to hold a given percentage of such bonds for regulatory reasons. Nonetheless, demand from foreign investors remains strong in some segments of the Swiss franc bond market, notably that for money market debt register claims. How do we explain this apparent paradox? One contributory factor is the distortions on the FX swap market mentioned before. While they make borrowing more expensive for foreign issuers, they have the opposite effect for foreign investors and offer special arbitrage opportunities. This allows investors from the US dollar or euro areas to achieve higher returns on a hedged basis. 5 The weekly auctions have been clearly oversubscribed, as can be seen from chart 8. Although the average yield to maturity is very low, bids have been significantly higher than actual allocation (blue), with some 60% of outstanding money market debt register claims currently in the hands of foreign investors. All in all, we can say that, despite strong demand for Swiss francs and low interest rates in Switzerland, the outstanding volume of the Swiss franc bond market has barely changed.