Meyrick Chapman is Director of Hedge Analytics and former Portfolio Manager at Elliott Management and Fixed Income Strategist at UBS.

The Swiss National Bank has long been coy about exactly how it allocates its mammoth stockpile of $1 billion in foreign exchange reserves. But the past few months have undoubtedly been difficult.

The returns on his stock investments are probably terrible, but the bond losses are probably even worse. From Switzerland sovereign wealth fund the central bank’s breakdown of asset classes and currencies, and the Form 13F it needs to complete for its US equity portfolio, I estimate its losses so far this year could be around 75 billion Swiss francs ($78 billion), or about 10% of Swiss GDP.

Even so, no one should spend much time worrying about it, let alone the SNB.

Some information on how it all happened. The SNB’s policy has been very different from that of other central banks, even though its approach has resulted in the same explosive balance sheet growth.

The expansion has been surprising. Before the Lehman bankruptcy and the ensuing eurozone sovereign debt crisis, the SNB’s reserves stood at just 80 billion francs. Today, the Swiss central bank’s foreign exchange reserves stand at just over 1 billion Swiss francs, or $1.04 billion.

Central banks like the Federal Reserve, the European Central Bank, the Bank of Japan or the Bank of England bought assets to boost liquidity in their own economies. These buying sprees were funded by issuing new money, which in turn was credited to the banking system as reserves.

On the other hand, the twelve-fold increase in the SNB’s reserves is the result of its fight against the manic appreciation of the Swiss franc. Swiss investors returning home and foreigners seeking refuge in the Eurozone mess sent the currency soaring that many saw it as the ultimate “safe haven”. A typically Swiss version of quantitative easing was born; the newly created Swiss francs were sold to those who claimed them and the proceeds were used to purchase foreign assets.

The SNB’s first choice was to buy European bonds. But as demand for Swiss francs went wild, the SNB had to look further, buying bonds and stocks in the US and elsewhere. The foreign demand for Swiss currency was thus converted into assets of the SNB.

Did it make Switzerland richer? Yes, a little, which is part of the story that follows. For the most part, however, the inflows of deposits created liabilities that the SNB’s policy aimed to offset with assets abroad. The goal was to prevent the franc from appreciating further, not to make money.

The SNB continued to buy foreign assets throughout the first quarter and could buy more if the pressures on its currency continue. Sight deposits at the central bank – a key measure of demand for Swiss francs – rose again after the invasion of Ukraine as demand for Swiss currency increased, briefly lifting the franc to parity with the euro at the beginning of March, and other purchases could take place.

At its meeting that month, the SNB said (emphasis below):

The SNB maintains its expansionary monetary policy. It maintains the key interest rate of the SNB and the interest rate on sight deposits with the SNB at −0.75% and is prepared to intervene in the foreign exchange market if necessary, in order to counter the upward pressure on the Swiss franc. In doing so, it takes into account the global monetary situation and the inflation rate differential with other countries. The Swiss franc remains very popular. Russia’s invasion of Ukraine has led to a sharp increase in uncertainty in the world. In this context, the SNB, through its monetary policy, ensures price stability and supports the Swiss economy.

The purchase of foreign assets should therefore remain a political priority for the SNB for the foreseeable future. After all, on the whole, the policy worked.

The SNB, however, made money because the assets it purchased appreciated in value. In fact, he made a plot silver.

If bond prices fall as much in the second quarter of 2022 as in the first quarter, the SNB will have an uncomfortable first half, with losses in the region of 120 billion francs (16% of GDP) possible if equities do not. not. retrieve.

Yet the reality is that the SNB’s long-term gains in the stock market far outweigh both the losses on bonds and the paltry returns offered to Swiss depositors. While central banks like the BoE and the Reserve Bank of Australia may have to recognize big losses on their QE portfolios, the SNB is likely in good shape.

I estimate his investment profit was around $90 billion at the end of 2021. The purchases since then have messed things up a bit, but he probably still holds a profit of around $65 billion. This considerable gain is a big cushion, and the reserves themselves were created from Swiss nothing.

After all, the SNB is legally bound to pay a maximum dividend of 6%, so it could not easily give away its profits. Instead, it has increased its provisions based on its assets since 2010. This distinguishes the SNB from other central banks, which have relatively thin provisions that can be quickly eroded as “quantitative tightening” progresses. The overall math of the transactions seems reasonable.

Moreover, market logic seems to favor the SNB. Losses on bonds and equities are usually associated with a rising dollar, which, even if it hurts their foreign exchange reserves, shows that the overall strategy can work, at least to some extent, in both directions. . When the Swiss franc rallies, their reserve holdings rise in value, when their reserve holdings fall, the Swiss franc reverses its unwanted appreciation.

The SNB will therefore not sleep much on its losses. Turns out, it’s good to be liked by investors.