What is going on in Switzerland?

In a nutshell:

• back in 2011, when there was a significant flight out of the Euro, the Swiss Natonal Bank (central bank, SNB), "pegged" the value of the Swiss Franc (CHF) at 1.20 Euro's in order to stem the rise in it's value and ward off the economic problems inherent with a rising currency value: tighter monetary policy in a declining economic growth environment.
• Yesterday, without warning and as a major surprise to financial markets, they ended the "peg".
• Remember that the CHF is considered a "safe haven" currency because of the perceived stability of the Swiss banking system.
• Crucial is the fact that any borrowers of Swiss Francs will have to pay almost 15% more to purchase them and pay down their loan. That is a huge new "penalty" and will have a significant impact on the already receding European Economy.

Throw in another batch of uncertainty

• into the already high and rising levels of volatility and as traders and emotional investors do: move out of riskier assets into safe assets.
• Bond prices up, equity prices down.

Bond Yields are back to record lows:

http://www.bloomberg.com/markets/rates-bonds/

(10 Year Government Bond yields):

US = 1.72%

Canada = 1.47%

Germany: 0.46%

UK = 1.47%

Spain = 1.58%

Italy = 1.74%

What does this tell us?

• Interest rates will rise when bond markets are concerned about inflation in the future.
• If target inflation for a central bank is 2% (at the low end)...
• to purchase a 10 year bond and hold it to maturity, a bond investor in Canada would get a negative real return (actual return- inflation) of approx. .5%, if inflation was at the 2% level.
• At the moment: either bonds are extremely expensive or deflationary forces are building significantly.
• for those expecting/counting on higher interest rates? 
• bond markets are sending you a message!