SNB's bond buying lowers "core" yields French and German borrowing costs have fallen sharply this year largely because of bond buying by Switzerland's central bank aimed at weakening the Swiss franc, according to a report released on Tuesday. Standard & Poor's, the rating agency, said bond markets have been distorted by an estimated €80bn in purchases of "core" eurozone countries" debt by the Swiss National Bank in the first seven months of 2012. "In our view, this has significantly contributed to the declining yields on bonds issued by the core sovereigns," it said. Widening yield "spreads" - or interest rate differentials - between German bonds and those of crisis-hit eurozone periphery countries such as Spain or Italy have highlighted investors" fears about a eurozone break-up. But the S&P report indicated bond markets were exaggerating those concerns. "I don't want to belittle the concerns of investors but they may have been exacerbated by the way that the SNB has come in buying core sovereign bonds," said Moritz Krämer, S&P's head of European sovereign ratings. French government bond yields rose sharply last year amid fears about France's public finances and worries about "contagion" effects from the eurozone debt crisis. But in May this year, the French 10-year bond yield dropped sharply from just under 3 per cent to 2.35 per cent even as the value of the euro was tumbling amid worries Greece would quit the eurozone. One banker familiar with the SNB's portfolio said the Swiss central bank had been "largely responsible for the mis-pricing in French debt" ahead of a cut in European Central Bank interest rates in July. On Tuesday, 10-year French bonds were trading at a yield of 2.3 per cent and their German10-year equivalent at 1.6 per cent. Paris has drawn comfort from the recent declines, which suggested financial markets were giving the benefit of the doubt to the fiscal policies of François Hollande, Socialist victor in May's French presidential election. However, the S&P report suggested the fall was also the side-effect of aggressive SNB action to cap the appreciation of the Swiss franc against the euro. S&P's estimates were based on analysing the central bank's stated asset allocation guidelines. According to the most recent available data to the end of June, the SNB holds 85 per cent of its reserves in government bonds and 60 per cent in euros. In August, the central bank held a record SFr418bn in forex reserves. The €80bn in estimated SNB purchases of "core" eurozone countries" sovereign debt was equivalent to almost half of the 2012 forecast combined full-year fiscal deficits for the bloc, which comprises the Netherlands, Finland and Austria as well as France and Germany. Bankers believe the SNB switched to buying French bonds because earlier purchases of German bonds had backfired. As the SNB bought Bunds, the spread between eurozone "peripheral" and German debt widened, scaring other investors and creating more haven demand for the Swiss franc. That caught the SNB in a vicious cycle that forced it to buy more euros to weaken the franc, according to a banker familiar with the situation. Mr Krämer at S&P said: "You can move the market if you are the SNB. They are big buyers. If they had bought big in the German market, they could have spread panic if French and other core countries" spreads had widened significantly against the Bund. At the same time, they may also have wanted the extra yield you get on French bonds. The SNB has also been responsible for distortions in the global currency market. As the central bank has bought euros to weaken the franc, it has tried to recycle those euros into other, safer currencies. That has created buying pressure on currencies of countries that still have triple-A rated debt, including the Australian dollar and the Swedish krona, which were widely believed to have strengthened over the summer because of demand from the SNB.