The Swiss National Bank’s surprise decision to end its exchange-rate cap signaled its confidence in further European Central Bank easing, which could further support U.S. debt and Eurozone hedged-equity exchange traded fund.
“The Swiss move is being interpreted as a signal the long-awaited QE in Europe is going to be announced next week,” Thomas Simons, a government-debt economist at Jefferies LLC, said in a Bloomberg article. U.S. yields “look too high relative to Europe if rates fall over there. We’re even going to have more currencies in the world looking for a home for investment.”
For instance, despite the the 3.5% dip Thursday, benchmark 10-year Treasuries have a yield of 1.77%. The iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), which has a 7.72 year duration, shows a 1.85% 30-day SEC yield. Year-to-date, IEF is up 2.8%. In contrast, 10-year German Bunds have a 0.47% yield. [Foreign Investors Prop Up Treasury ETFs]
Meanwhile, thirty-year yields set another record low Thursday, touching 2.39%. The PIMCO 25+ Year Zero Coupon US Treasury (NYSEArca: ZROZ), which has a 27.4 year duration, has a 2.49% 30-day SEC yield. ZROZ is up 5.5% year-to-date.
During the Eurozone financial crisis, the Swiss franc quickly appreciated against the euro currency as a safe-haven asset. Consequently, Switzerland’s central bank was forced to maintain a foreign exchange cap by purchasing euro assets to keep a strong franc from hurting the country’s exporters.
However, the SNB’s move indicates that it believes the ECB could further weaken its currency through loose monetary policies, which would make supporting the franc cap unsustainable. [Swissie Surge Felt Across ETF Landscape]
If the ECB will go through an aggressive quantitative easing program, the Eurozone market may see a similar liquidity-fueled growth support as we witnessed in the U.S. Still, potential investors should monitor currency risks as a weakening euro currency could weigh on U.S.-dollar-denominated.
Instead, investors can take a look at the Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ), iShares Currency Hedged MSCI EMU ETF (NYSEArca: HEZU) and WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ), which track Eurozone equities and hedge against a weakening euro currency. [Europe ETFs to Invest Like a Millionaire]
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Max Chen contributed to this article.