Janet Yellen opened the festivities at this year’s Jackson Hole economic symposium by musing on what central bankers had learned since the crisis and how they can deal with future recessions in a world where interest rates are far lower than in the past.
Unsurprisingly, bond-buying and “forward guidance” featured prominently in Yellen’s narrative of successful new tools. (On the other hand, scholars have estimated the combined impact of these measures was an unemployment rate a mere 0.13 percentage points below where it would have been using purely conventional instruments.) Read more
When x happens, yields fall — Rule 1?
It’s not a search for yield, it’s a search for safety — Potential Rule 2?
Two charts to make the point for us once again from the good folks at BofAML’s relative value department: Read more
Here’s a rough piece of calculation based on the last few years of news: When x happens, yields fall. An example of this post-GFC rule-of-thumb was Brexit and its fallout.
The potential lesson from said rule is that yield hunting isn’t fun anymore, say Credit Suisse’s William Porter and team, with our emphasis: Read more
For bonds, at least, that question seems to become ever more rhetorical as things get further from what used to be considered normal.
But we’ll push on.
ICYMI, from Deutsche’s Jim Reid and with our emphasis:
On this theme, both Bloomberg and Reuters reported yesterday that Deutsche Bahn has become the first non-financial company to issue debt with a negative yield. The railway operator sold €350m of five-year bonds with a zero coupon which were priced to yield -0.006% according to Bloomberg.
If you’d asked any observer four or five years ago which country would be the first to leave the European Union, few would have guessed it would be the UK. Of all the countries in the EU, the UK is probably the one with the least to gain from meaningful changes in its economic relationships with its neighbours. Yet here we are.
London’s stock markets, priced in sterling, probably understate the expected impact on the UK economy given the sectoral and geographic earnings mix of the listed companies. So we looked at the short-term interest rate markets to get a sense of how traders think the Bank of England will react to the vote. Read more
From JP Morgan’s Flows & Liquidity, a chunk of negative rate stats that are pointing us somewhere. It’s just unclear exactly where right now:
Splitting by region, the stock of Japanese government bonds trading with negative yield reached $6.1tr. This brought the proportion of JGBs trading at negative yields to 78% of the total outstanding amount.
You’ll have noticed that the yen and Nikkei were displeased yesterday. Like throw your toys out of the pram because you didn’t get what you wanted displeased. Like one of the worst one day JPY moves in the past decade displeased.
What they didn’t get, and what prompted that tantrum, was any auld bit of easing from the Bank of Japan.
And here are eight potential reasons why the BoJ disappointed, from SocGen: Read more
Some guesswork from Jefferies on Wednesday:
The upcoming 27-28 April BoJ meeting is likely to push the authorities into finally admitting a plan to consolidate the JGB holdings into perpetual bonds alongside a formal move away from inflation targeting to nominal GDP targeting. There is a growing realization that there are effective limits to how much more JGBs can be acquired…
From Deutsche’s Robin Winkler on the dispersion of pain from Japan’s new, tiered, negative rates regime:
It seemed so plausible. Break through the zero lower bound and ta dah! A new scale of economic stimulus can be engineered.
And yet, as the likes of us, Frances Coppola and even Downfall Hitler have been warning for a number of years, this was always a silly presumption because negative carry creates an entirely different incentive structure to that of a positive carry world.
Notably, it encourages predation, monopolisation, hoarding and in some cases, even contraction as opposed to growth. Read more
Macro Man might just be on to that something here…
That green line heading down and away from the rest (which you shall see more easily after some enlarging via clicking) is the performance of Japan’s banks since the BoJ went negative last week.
Not sure how many more pixels you’ll tolerate us spilling on the BoJ’s move negative, but this from Simon Derrick at Bank of New York Mellon seems worth your time. With our emphasis, and pars broken up for online readability:
Whether or not the BOJ’s decision was a direct reaction to the ECB’s decision to potentially push even further into negative territory doesn’t really matter. Indeed, it doesn’t even really matter whether or not the BOJ was trying to weaken the JPY by their move (in our opinion plausible deniability remains a key tool for central bankers).
What does matter is that four of the eight members of G8 (France, Germany, Italy and Japan) now have an official negative deposit rate while Canada continues to suffer the impact of collapsing oil prices (Russia, which has had its membership suspended, suffers from the same issue of course).
ICYMI, and on the back of the BoJ going negative, “the universe of DM government bonds trading with a negative yield rose to a record high of $5.5tr, or 24% of the JPM Global Government Bond Index,” according to JPM.
If the BoJ and Mr Kuroda are thinking about storage costs – after taking interest rates to minus 0.1 per cent and saying they “will cut the interest rate further into negative territory if judged necessary” — this might be useful.
From Oxford Econ’s Gabriel Stein & Ben May:
Did you know there was a hidden credit crunch going on in the world economy as far into the post-GFC-crisis era as 2015?
UBS economist Paul Donovan dishes the details in a report on Tuesday, noting how the crunch related primarily to inter-company credit, the sort that companies use to finance inventory. The good news, says Donovan, is that smaller business finally seem to be willing to acquire inventory, suggesting the credit crunch may finally be concluding.
Quantifying the scale of the potential inventory turn-around isn’t going to be easy. As Donovan notes:
This chart shows the process at work after 2008. The NFIB survey showed a collapse in the desire of small businesses to hold inventory. Meanwhile their suppliers (large businesses represented in the ISM data) continued to expect an increase in demand as they viewed their customers’ inventory levels as inadequate by historical standards.
The NFIB and ISM surveys are not ideal measures, as sentiment surveys have a tendency to overreact to underlying fundamentals. However, the sub-headline indices of these details may be thought of as less liable to media influence and political bias.
Unfortunately, in spite of the overwhelming importance of inter-company credit as a source of finance, most economies fail to provide a high frequency, precise data series for this measure. There are occasional surveys (like the US National Association of Credit Managers) but these have a weak correlation what official data on inter-company credit is available – possibly a reflection of the poor sample size.
A tiered depo rate (to be explained below) coming from the ECB at their meeting on Thursday, you say?
Allowing them to potentially push past the expected (per our inboxes) coming cut in the depo rate by 10bps to -0.30 per cent, alongside other easing measures?
Well… the mooted tiered system itself wouldn’t be unprecedented and we look forward to even the expected cut allowing our go-to measure of euro-nuttiness to keep ticking up. From JP Morgan’s Niko Panigirtzoglou and team over the weekend: Read more
We’ve spilt a fair few pixels on the potential limits of negative rates and proposals to get around the pesky zero lower bound. Citi’s Buiter has weighed in on this for some time and has done so again on Thursday.
We present three practical ways to eliminate the ELB: i) abolish currency, ii) tax currency or iii) remove the fixed exchange rate between zero-interest cash currency and central bank reserves/deposits denominated in a virtual currency.
There’s more in the usual place for those who want it but, for now we thought we might just pull out his list of disadvantages to getting rid of cash Read more
Regarding how low negative interest rates can go, Paul Krugman wrote a couple of weeks ago that:
When central banks push interest rates on government debt below zero, the effective lower bound is the return on cash held by people who would otherwise be holding that government debt — not people looking to expand their checking accounts. So the liquidity advantages of bank deposits over cash in a vault are pretty much irrelevant. It’s all about the cost of storage.
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.
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
Or, why it’s nuts out there
In this series we have thus far presented the economic argument for the introduction of “free money”, whether it be via the rise of private market virtual units or central-bank dropped bundles of helicopter money.
The question which arises, however, is what does it mean when anyone in an economy can self-create money and have it respected without the need for national guarantees? The answer, presumably, is that there is such a shortage of money relative to output that the system flourishes with every virtual unit that’s created by the system — i.e. there is more risk in hoarding output than in distributing it.
And more specifically, that there’s a greater benefit in creating money “no strings attached” than with conditionality attached to it in the form of bank credit money. Read more
We promised at the end of our previous post that we would qualify the economic case for the introduction of “free money” with some direct references to Willem Buiter, Citi chief economist and former BoE MPC member.
So here follow some of his observations on all things “money” during a liquidity trap, as plucked from his papers on seigniorage, the nature of irredeemable fiat money, numerairology and the use of virtual currencies to break through the ZLB from the last decade or so. Read more
In a previous post we presented research by Willem Buiter, Citi chief economist and former BoE MPC member, which he conducted in the mid 2000s, into whether virtual currencies could be a useful mechanism for breaking through the zero-lower bound.
The idea in many ways represents an evolved form of QE, in which differentiable units from dollars are pumped into the economy, inducing an effective negative interest rate on dollars due to the fact that there is less of the new currency in circulation than the established one. Seen from this light, the recent rise of private virtual currencies could can be seen as amounting to the market’s own endogenous version of QE. Read more
Here’s a crazy thought to start the New Year year with. What if virtual currencies were born less of an organic anti-government peoples’ movement and more of extreme unconventional monetary policy by the state? The ultimate central bank Jedi mind trick if you will, which takes easing to levels that conventional policy just cannot go.
But even if it’s not a plan hatched directly by monetary bodies to serve the interests of the state, there’s still a strong argument to be made that virtual currencies could be doing the Fed, the BoE and even the ECB a big favour. 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.
The Credit Suisse European economics team are growing concerned about Mario Draghi’s disinflation problem:
The ECB meets this week and expectations about what Draghi and team may or may not do seem to be erring towards the non-event side of things.
But, as Beat Siegenthaler at UBS observed in a note on Monday, there still seems to be a lot of confusion about the likelihood and usefulness of negative rates being introduced. A rise in eurozone rates over the past two weeks has only added to the confusion: Read more
Everyone has an open mind about negative rates these days… Swiss National Bank chief Thomas Jordan has said he certainly does following this piece of repeat advice from the International Monetary Fund’s annual report on Switzerland (our emphasis):
The conjuncture of Switzerland may render some of the potential drawbacks [of negative interest rate] less relevant than in other countries. Activity in the interbank market is already very low, as all banks have excess liquidity. Switzerland is experiencing strong credit growth, particularly in the mortgage market. The impact of negative interest rates on mortgage rates depends on the pass-through.
Back in July, 2012 the Danish central bank, Nationalbanken, lowered the deposit rate to -0.2 per cent. Back then we wrote that it was going to be costly for the banks, and that money market rates were going deeper into negative territory. With Draghi’s comments last week, how did that whole negative deposit rate action turn out for Denmark?
Nordea had a note out last week on that very subject. Now, before we move, let’s remember that Danish monetary policy is tailored around the FX peg. The deposit rate was there to assure outflow because of mounting pressure on the EUR/DKK pair. Read more
Gary Jenkins writing in Credit Matters this week gets to the heart of the matter when it comes to what investors should do with their money (our emphasis):
Is nowhere safe? The natural reaction to this is that fi nancing for banks should become more expensive. We are already seeing this reaction in the market to some degree. But what does this mean for a product like Cocos? How does an investor monitor the risk of conversion if the ECB could, on any given day, decide to withdraw liquidity unless the bank were to improve its capital position?