What will save the Wunderbund* (and related QE trades)?
Bund sell-off continues. 10yr German govt bond yields jump to 0.66%, hit fresh high for 2015. pic.twitter.com/5KEoszrCXW
— Holger Zschaepitz (@Schuldensuehner) May 7, 2015
From a hyperbolic Citi, a new normal stat du jour:
The end of the world as we know it is approaching. Very few market participants remember a bond market where the structural trend in yields wasn’t relentlessly lower.
We can continue to quibble about the scope for marginal performance in both rates and credit – and quibble we will over the coming months. But for all intents and purposes any € fixed income investor is now picking up pennies – if not outright paying for the privilege of taking someone else’s credit risk. The 30yr bull-run in fixed income is on its last legs.
One third of €-denominated bonds have negative yields. 82% now yields less than 1%
With Greek sovereign yields blowing wider on Thursday (and pretty much staying there), it’s worth revisiting what exactly might happen if, say, May 1 arrives and Greece fails to pay the €200m due to the IMF that day.
Received wisdom has it that the ECB will withdraw the ELA — emergency liquidity assistance — currently propping up the Greek banking system, which will promptly collapse; Tsipras and Co would then be forced to bring back the Drachma (or similar) and Greece would exit the eurozone.
But what do the “rules” here say? In the case of the ELA they run to all of two pages. Click the image to read in full. Read more
Citi’s chief economist and former BoE MPC member Willem Buiter is worried that the ECB’s new profit-and-loss sharing stance on National Central Bank asset exposures risks transforming the 19 NCBs of the eurosystem into a glorified currency board.
It’s a policy that also stands to bring needless uncertainty and volatility into the system. Making NCBs accountable for their own assets in his opinion only delays risk-sharing. If Europe is to defend its currency union there’s no way out of risk sharing in the long run. In fact, risk-sharing is precisely the point of a currency union. It’s what makes a currency union work. Read more
Citi’s Chief Economist Willem Buiter spent some time with FT Alphaville explaining why he believes Draghi’s concession on profit and loss sharing among ECB member national central banks turns, in all likelihood, the single monetary unit into nothing more than a glorified currency board.
Quick background: The ECB’s profit-and-loss sharing mechanism became a key negotiating point ahead of European QE. For the Bundesbank, QE was only viable if NCBs assumed most of the responsibility for losses on assets they brought into the consolidated balance sheet. In the end Draghi acquiesced by reducing risk-sharing to only 20 per cent of assets.
A currency board works by pegging liabilities (central bank reserves and currency) to an exchange rate target, rather than a CPI or employment target. The monetary authority managing the board achieves the target by ensuring all commercial entities served by the system can convert the authority’s liabilities into foreign currency at any point. In short, there’s a guaranteed FX convertibility promise at the central bank. Read more
From JPM’s Raphael Brun-Aguerre
And from the same source (with our emphasis): Read more
In its implementation of the PSPP, the Eurosystem intends to conduct purchases in a gradual and broad-based manner, aiming to achieve market neutrality in order to avoid interfering with the market price formation mechanism…
– ‘Implementation aspects of the public sector purchase programme’, European Central Bank
All hail the Euroglut, that oh so corpulent result of Europe’s (read: Germany’s) huge excess savings — which hit a record €234bn at the end of last year as oil prices collapsed and are projected to hit €300bn over the course of 2015 if oil prices stay that way.
You can, in part, blame said Euroglut (along with ECB QE and negative rates) for this type of thing…
As to the eventual size of these outflows? Read more
The UK did worse than almost every other developed economy from 2007-2012 but has been among the best performers since the start of 2013. Slightly out-of-date chart via the Reserve Bank of Australia:
What gives? According to a new analysis from Goldman, this demonstrates both the damage to the UK’s banking system after the crisis and the subsequent power of credit easing, specifically the magic that was worked on bank credit spreads after Mario Draghi uttered his priestly incantation in July, 2012: Read more
Peter Doyle, an economist and former IMF staffer, argues that for Greece continued emergency lending assistance is a necessity.
_________ Read more
This from Dan Davies is worth a bit of your time — supposedly four minutes of your time according to Medium’s time-thingy.
It makes the very good point that the lack of Greece-dominated headlines over the weekend is most probably good news. As Dan says, we haven’t had stories of deposit flight and bank runs, there haven’t been anymore leaked documents, the ECB hasn’t piled on any more pressure and there has been no grandstanding of note — from Greek or German politicians.
From Davies: Read more
You know how Bitcoin miners get a natural advantage in the cryptocurrency pyramid of inequality because of being early adopters that get first dibs on all new currency that’s created?
Turns out the ECB has a similar problem.
Here’s a nice write up of the distributive problems associated with QE-style helicopter drops in the current asset-purchasing framework from Pierre Monnin, a fellow at the Council on Economic Policies (our emphasis):
In practice, targeted money drops, like quantitative easing (QE), do not spread instantaneously throughout the economy. Like a vaccine, money is injected at one place and then disperses more or less quickly to other areas. Stephen Williamson and Olivier Ledoit have closely looked at how a money injection moves through the economy. They both use a model in which different economic groups trade randomly and repeatedly with each other.
The ECB just announced it will increase monthly buying of assets by €60 bn which will continue until September 2016, and will do so on a risk-sharing basis on 20 per cent of the assets purchased rather than on an entirely pooled based. More details: Everywhere.
For now, here’s the first comment in our inbox from Marc Ostwald at ADM Investor Services, who says the risk sharing component is limited: Read more
Last week’s Swiss surprise was a useful reminder that betting against currency pegs is one of the classic macro hedge fund trades.
Think Soros and Druckenmiller versus the Bank of England. It’s attractive because the cost of maintaining the position is usually small while the potential upside can be quite large. Someone who had been continuously buying short-dated puts on EURCHF at 1.2 since the establishment of the Swiss National Bank’s exchange rate floor over the past few years would have paid a pittance for the opportunity to make a lot of money. Read more
UPDATE: The full, 263 point, opinion is out and here.
Do click through for the full statement on OMT (and QE by extension) from Pedro Cruz Villalon, one of the European Court of Justice advocates generals: Read more
From JPM’s Flows & Liquidity team, this is what ECB QE incontinence looks like:
CreditSights points out today that changes in gross ECB liquidity provided to the euro area’s banking sector closely track changes in 10 year Bund yields:
If you don’t you might miss all the capital outflow which, according to Deutsche’s George Saravelos, “not only has depreciatory implications for the euro, but also suggests that the consequences of Euroglut – low global bond yields and a stronger dollar – are here to stay.”
Oh, and blame Germany. Read more
Peering into the near future, Europe’s largest economy remains central to the direction for Europe as a whole. And, judged by the recent long profile of chancellor Angela Merkel in the New Yorker, there is self-confidence in the Bundestag.
Here she is dismissing the Russian president, after a macho incident with a labrador:
I understand why he has to do this—to prove he’s a man,” she told a group of reporters. “He’s afraid of his own weakness. Russia has nothing, no successful politics or economy. All they have is this.
Political economy is the point, however. Read more
On the potential death of that long awaited negative deposit rate, interesting thoughts from HSBC’s Steven Major below if sovereign quantitative easing does eventually raise its head in Europe.
But first, a necessary nod to QE skepticism from Peter Stella:
Rather amazingly, a crude quantitative measure of ECB stimulus—the sum of refinancing operations and securities held for monetary policy purposes—peaked the very month of Dr. Draghi’s [whatever it takes] speech. Those who are now seeking QE apparently believe that, despite the inverse correlation between quantitative stimulus and actual results, an increase in the size of the ECB balance sheet will lead to an outcome superior to that associated with the increase in policy “size” evident above during the 14 months prior to the Draghi speech. During that time, the sum of ECB monetary operations instruments expanded by 168 percent without any discernible palliative impact on markets. So if the definition of insanity is repeatedly trying the same behavior and expecting different results, the market would appear slightly insane. Or perhaps it is simply guilty of failing to fully comprehend the complexity of monetary operations, and more specifically, which monetary medicines work and which do not.
One of the problems with ECB QE, as we all know, is the lack of a collective eurobond or sovereign-neutral asset to target, which would make asset purchasing less, you know, subjective vis-a-vis the assets you choose to support and those you don’t.
It is for this reason that analysts are divided about the type of assets Draghi may or may not be inclined to target.
There is, after all, a delicate balance between targeting ETFs or real-estate trusts neutrally and buying corporate stock or housing, which can evoke the start of quasi nationalisation of the economic system, if not government favouritsation of specific sectors, corporations or industries. Read more
With a large hat-tip to the Irish Times, here’s a friendly 2010 missive from former ECB president, Jean-Claude Trichet, to former Irish finance minister Brian Lenihan suggesting, secretly of course, that Ireland might just want to apply for that bailout if it wanted to continue to enjoy access to emergency liquidity assistance. As the Irish Times says, “around €50 billion [in ELA] had been extended to Irish banks at the time – with additional funds approved by the ECB the day before.”
More so, the letter “was sent the day after Central Bank governor Patrick Honohan appeared on Morning Ireland to say Ireland had no option but to apply for support. The ECB letter called for a “swift response” from the government. Two days later, on November 21st, the formal application for the bailout was made.”
You’ll find the letter itself below, but here are the key lines: Read more
The European Central Bank’s latest quarterly bank lending survey shows that lending standards are getting looser and that demand for credit is rising. Lorcan Roche Kelly of Agenda Research summarised the main findings with this handy chart:
Negative numbers for the orange-ish lines mean that lending standards have loosened (slightly), meaning credit is easier to get. Positive numbers for the green and blue lines mean that demand for loans is increasing. Overall the supply of loans is still shrinking, but not as fast as it was in recent years and loan growth could even return by the end of 2015 if current trends hold up. That said, we can’t help but note the large difference visible in the chart between loans to households (orange and beige) and loans to businesses (red). Read more
The results of the ECB’s Asset Quality Review are in. As ever it was the taking part that counted, we’re all winners here. Were you minded to look for losers, however, here’s the FT:
Italy’s central bank was thrown on the defensive on Sunday as its banking sector emerged as the standout loser in health checks aimed at restoring confidence in the euro area’s financial sector.
Nine Italian lenders fell short, out of 25 banks mainly in Europe’s periphery and Germany that need more capital following the stress tests. The general reaction, however, seems to be that the whole exercise is credible, without unpleasant surprises, and that we really need to talk about lending. Read more