Gary Jenkins at LNG Capital brings us news on Wednesday that… yes, peripheral eurozone bond yields are or in some cases are just about to trade through US Treasuries.
But why should we be shocked about this?
Or as he puts it:
There has been a few headlines recently which suggested that we should be shocked that Spanish 10 year government bond yields now trade through treasuries and that the Italian equivalent is just a few basis points away. I think that these Eurozone countries should trade through treasuries. I think Portuguese bonds should do the same. Greece? Not so much… The fact is that since Mario Draghi started acting like a modern day central banker and the leading politicians looked into the abyss of what the default of a major European country like Spain might look like the yields on the so called ‘periphery’ European bonds have been converging with those of the core at a rapid rate.
Here’s the fixed-rate, four year, €400bn central-chunk of Draghi’s swarm attack that is the targeted LTRO, charted by Morgan Stanley’s Huw Van Steenis and team:
For all practical purposes we have reached the lower bound…
Are we finished? The answer is no… within our mandate, we’re not finished yet.
Both were statements by Mario Draghi on Thursday. It’s really the swarming effect of the policies the ECB announced on Thursday, after all, right? Not so much the Outright Monetary Transaction-style bravura, which (let’s not forget) the market also underestimated two years ago. Read more
Wait for those “details” on how the ECB will operate negative rates — plus “Further monetary policy measures to enhance the functioning of the monetary policy transmission mechanism”… (sounds like an LTRO to us)
But for now, note the red.
Here’s Nomura playing ECB ahead of Thursday’s meeting at which — in accordance with the FT and the “always listen especially carefully to Peter Praet” theory — there’s an increasing expectation that some sort of targeted LTRO is going to be announced alongside some rate cuts.
We got the trial ballon, after all, and everybody does so love an LTRO. Read more
A lot of people are puzzled over why US yields are falling when nothing has changed on the Fed communication side, and QE is supposed to be slowing.
Frances Coppola notes an even stranger phenomenon. When you look at the very big picture you realise that if there is a correlation between QE and rates, it’s actually a very counterintuitive one:
Every time QE is announced, yields rise: when it ends, they fall. And no, this doesn’t just affect the 10-year yield. The same basic shape can be observed on just about any maturity over 1 year (short-term rates are propped up by the positive IOER policy).
… and back on the “buy foreign bonds” option. Never mind the former might never happen, let alone happen when the ECB meets next week and does its best not to disappoint.
From Morgan Stanley’s FX team: Read more
There’s a good note from Goldman Sachs this week on the implications of negative rates at the ECB.
But given that many of the points echo much of the discussion already featured on FT Alphaville for years, we’ll cut straight to the interesting bits.
Goldman agree there isn’t anything conceptually special about negative rates because bond math works with negative numbers (as it’s focused on real returns). However, they add, there is a specific reason why negative rates might have qualitatively different macroeconomic implications, unless controls on cash were put in place with them: Read more
Some nice charts courtesy of Credit Suisse on Friday comparing European inflationary trends with those of Japan in the 1990s:
Euro chart du jour, from Nomura:
We’d call it the new yen, but we all know what happened there. Read more
An interesting job going at the ECB? (Click for the details.)
RBI governor Rajan, when not being taken to task by a tie-less Bernanke, recently railed against QE spillovers. Most pertinently he said (with our emphasis):
By downplaying the adverse effects of cross-border monetary transmission of unconventional policies, we are overlooking the elephant in the post-crisis room. I see two dangers here. One is that any remaining rules of the game are breaking down. Our collective endorsement of unconventional monetary policies essentially says it is ok to distort asset prices if there are other domestic constraints to reviving growth, such as the zero-lower bound. But net spillovers, rather than fancy acronyms, should determine internationally acceptable policy.
Otherwise, countries could legitimately practice what they might call quantitative external easing or QEE, whereby they intervene to keep their exchange rate down and build huge reserves. The reason we frowned on QEE in the past is because we believed the adverse spillover effects for the rest of the world were significant. If we are unwilling, however, to evaluate all policies based on their spillover effects, there is no legitimate way multilateral institutions can declare that QEE contravenes the rules of the game. Indeed, some advanced economy central bankers have privately expressed their worry to me that QE “works” primarily by altering exchange rates, which makes it different from QEE only in degree rather than in kind.
We wonder if, after a brief blaze of real scrutiny, people have started to look past the imposition of a negative deposit rate by the ECB in favour of the more seductive and mysterious ECB QE and how it might be constructed. And we wonder if that is something of a mistake.
How a move to negative is constructed will, of course, have much to do with what it is intended to achieve — a weaker euro at last check — but we also can’t help but think it would be cool to make sure it won’t cause too much harm either. Herein lies a plan. Read more
Unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation…
– Mario Draghi, April ECB press conference
Don’t try saying that with a mouthful of peas.
More seriously, spot the caveats. A few members of the ECB governing council have since added to the noise around ECB QE — Nowotny, Mersch, Constancio, Coeure and Weidmann — but we feel better no informed than when the presser ended on Thursday. Read more
Ebbing, one month at a time. (Via Eurostat’s March flash estimate)
37 minutes of Ireland’s Doctor Doom. Read more
We know who he is, we just don’t get what he’s doing. He does so like confounding expectations on his island of stability.
This time with inflation at 1 per cent there was a belief that Draghi would make some sort of compromise gesture while keeping rates on hold, even if it amounted to SMP tokenism. But, nope, he disappointed… despite the ECB’s own 2016 inflation forecast coming in well below 2 per cent. Doing nothing in the face of that isn’t exactly reassuring — it’s a lot easier to fight deflation risks than the real thing. Read more
To QE or not to QE remains the question. Comfortingly, just about everybody is united in uncertainty.
Here’s JP Morgan (our emphasis throughout):
Our own expectation is that the ECB will simply stay on hold for a very long time (at least until late 2016). If correct, it would make the coming months and quarters very uncomfortable for the central bank and it may not take much more of a disappointment in the data to trigger a small policy change. We are open-minded about this. But, unless the outlook changes very significantly, we think that any policy change will be a token gesture, rather than something substantive.
BNP Paribas: Read more
Actually, it’s a €1.5tn question… at least according to SocGen. But it’s not very clear if that matters considering the barriers to euro area QE are so high.
We don’t suppose the killer argument in favour will be that “an ECB QE programme of €1.5 trillion could lower the 10y Bund yield by 100bp, pushing it down close to the 10y yield of JGBs (0.6%)”, though it’s worth a shot. There might be more mileage in pushing the Dax angle. Read more
Just how much would tickets go for at a German Constitutional Court hearing into any future quantitative easing programme by eurozone central banks… if a €1tn programme could easily buy a fifth of German bonds in a year?
Buy equities said man owning equities. Maybe buy loans hinted man at the ECB:
We think that a revitalisation of a certain type of ABS, a so-called plain vanilla ABS, capable of packaging together loans, bank loans, capable of being rated, priced and traded, would be a very important instrument for revitalising credit flows and for our own monetary policy… Read more
Arguably, none of the below matters now.
That’s the prime effect of the German constitutional court turning to the European Court of Justice for a ruling on whether the ECB’s sovereign bond-buying programme is a “structurally significant transgression of powers” under European treaty law.
Big words. But the backing of the Bundesverfassungsgericht judges (pictured right) for that view gets rendered into just another opinion, pending the ECJ’s decision. And the arc of the ECJ’s justice is long, turgidly written, but ultimately quite friendly to pieces of bailout architecture that have an odd relationship to the treaties — as in past musings on the ESM.
But the really interesting thing is that regardless, the OMT’s purpose apparently remains almost completely lost on the court. Read more
Just in case Draghi actually, finally, opts for negative rates later today and puts us all out of our misery, Deutsche Bank’s George Saravelos has taken a stab at how big a hit the euro would take (with our emphasis in the last paragraph): Read more
Now vs 2009 that is, when a brief flirtation with deflation in the eurozone proved short lived and provided ammunition for those who deny a Japanese-style outcome–back then the headline inflation rate dropped to -0.6 per cent in July 2009 but was negative for only five months and rebounded to +1.7 per cent only a year later.
However, as we await for the ECB to act or not later in the week, Capital Economics’ Jonathan Loynes took the time to note there are good reasons to think a new bout of deflation could be both longer- lasting and more pernicious than the last one (with his emphasis):
Citi’s research team highlights the important point that Germany’s Bundesbank has signalled that it is open to an end to ECB sterilisation operations.
The move follows consecutive failures by the ECB to sterilise its bond purchases in the last month.
As the Citi analysts note, the failures potentially indicate funding pressures in the Eurozone, following the removal of a lot of excess liquidity from the system:
with the ECB failing to attract sufficient bids for its liquidity absorbing 7-day fixed-term deposit, sterilisation is not functioning as well as intended, with investors preferring to keep hold of some funds as the excess liquidity position dwindles. We suspect that the ECB could soon announce that it will suspend sterilisation at least until July 2015, during which period the ECB has committed to full allocation fixed rates for the 7-day MRO. Alternatively, the Governing Council could decide to lower/abolish minimum reserve requirements (last change from 2% to 1% in Dec-11) in order to tackle the recent increase in overnight interest rates that runs counter to its very accommodative monetary policy stance.
Is this contrarian? The argument from JPM is that the long awaited German Constitutional Court ruling on the ECB’s untested Outright Monetary Transactions might actually buttress the credibility of the OMT, rather than undermine it. Read more
First, rewrite history (as Aufhebung). Read more
OK, one country can print in its own currency, while the other can’t. There is also no suggestion of an intimate circle of support in the US by which banks and the government prop each other up (as that’s what the Federal Reserve is for).
But after the FT’s story that the ECB is poised to get tough on Sovereign Bond Risk, an interesting chart arrives from Huw Van Steenis and the Morgan Stanley banks team: Read more
Consider this chart from Morgan Stanley:
And then this from Barc: Read more
Yup, we’re back here again. Here’s how Credit Suisse ranks the ECB’s options if, or when, the increasingly dovish governing council decides that more easing is necessary:
The first option comprises exhausting the ECB’s standard policy lever by cutting rates further. We expect this to be the first response if more needs to be done and could be prompted by inflation falling to 0.5% y/y or lower. A further cut in the key policy rate would also entail taking the deposit rate into negative territory.