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.
chart 12).4 The negative interest rate affected the entire banking system, and Danmarks Nationalbank found itself in uncharted monetary policy terrain.5 The introduction of negative interest in Denmark showed that moderately negative deposit rates are a viable monetary policy instrument. Concerns that lowering interest rates into negative territory could potentially precipitate a flight to cash had previously dissuaded central banks from using this measure. When interest must be paid on bank deposits or money market instruments, holding cash in a vault may appear more advantageous. However, this too entails high risk, and, in the case of large sums, sizeable costs in terms of logistics, storage and insurance. Such costs can outweigh those of moderately negative interest rates; in Denmark, a flight to cash did not take place. What is my interim conclusion for this second phase? Once the interest rate instrument had come up against its limits, the euro crisis forced central banks in neighbouring countries to deploy unconventional measures. In doing so, these central banks were able to regain a certain room for manoeuvre in influencing monetary conditions. At the same time, they had crossed into uncharted monetary policy terrain, since practical experience of calibrating these unconventional measures and of gauging their effects was still limited in comparison to that of the conventional interest rate instrument. This second phase shows that unconventional measures can have a role to play in influencing monetary conditions.