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
The Credit Suisse European economics team are growing concerned about Mario Draghi’s disinflation problem:
The Great Draghini has spoken on negative rates, collateral and on volatility:
DRAGHI – HAD AMPLE DISCUSSION OF NONSTANDARD MEASURES
DRAGHI – DISCUSSED NEGATIVE DEPOSIT FACILITY
DRAGHI – TECHNICALLY READY FOR NEGATIVE DEPOSIT RATES, BUT NO REASON TO ACT RIGHT NOW
From Morgan Stanley’s combined banks/economics/credit/rates research team on Tuesday:
If the ECB were to introduce negative rates, FT Alphaville has mostly focused on the idea that the it would do so primarily in its deposit rate. That’s where market chatter has largely concentrated.
But as someone wiser than us noted in an emailed comment, that would be almost entirely redundant. Read more
This is a short follow-up to Monday’s negative rate confusion and prepay-tax option post.
In it we argued two very simple points:
1) Negative rates might very well cause Eonia to go up because they are in fact liquidity contractionary.
2) Negative rates are contractionary because they encourage all of the following: banknote hoarding instead of excess reserves, capital flight (which manifests by means of a depreciating exchange rate which can impact non-depository asset valuations), the prepayment of private tax liabilities, the unwinding of LTROs/MROs, the resale of ECB held bond assets back into the market.
(With some header credit due to Mark Dow)
He came, he cut, he stuck a load of fingers in the air…
The tl;dr version of May’s Draghi presser involved the ECB chief mentioning a heap of possible actions — from getting the “dead” ABS market going to help SMEs, through to negative interest rates, while giving a little bit of forward guidance on policy — but without committing to anything concrete. Read more
The conspiracy channels continue to make a big deal about the backwardation of gold — which is a situation in which gold prices for today are higher than for tomorrow. The thinking is that this must indicate rampant demand for physical gold.
In reality, since gold is a highly financialised commodity, the backwardation signal doesn’t actually indicate the bullishness they imply it does. Rather, it suggests something entirely different: that interest rates in conventional money markets are turning increasingly negative. Read more
Negative rates, as we’ve discussed before, are a funny thing.
On the one hand they can send an immensely powerful message. On the other hand they have the power to seriously and dangerously disrupt core economic mechanisms by magnifying the physical hoarding incentive — this helps to create a negative feedback loop that ultimately crowds out capital and leads to voluntary capital destruction. Read more
People are still scratching their heads over what possibly sparked crude oil’s sell-off in the middle the US trading day on Monday.
Explanations in contention include: fat fingers, SPR talk and general illiquidity due to the Jewish New Year. Read more
FT Alphaville has presented its case on negative rates and zero deposit rates here and here (amongst other places).
What we believe is that rather than stimulating the lending market — and the economy along with it — such a rate policy could have a disastrous impact on collateral markets and money market funds, not to mention the net interest income of lending institutions. All of which could unleash a protracted deflationary spiral. Read more
The FT’s Greg Meyer had a great piece out last week about the negative impact micro yields are having on the broker sector.
For a long time, the broker-dealer model has depended on the ability to reinvest customer funds to earn additional revenue. But in a zero-yield world that source of revenue is becoming constricted. Read more
Fee waivers and duration extension, according to Fitch’s Fund & Asset Manager rating group.
They’re talking, of course, about how European money market funds will react to the ECB’s decision to cut its deposit rate to zero, a fact which should soon push the Euro overnight index average (Eonia) to historical lows of between -15 and +15 bps, putting MMF yields at risk of negativity. Read more
The latest sovereign to borrow at negative yields — France.
The cut in the deposit facility rate to zero will almost certainly move cash bids in short-dated instruments into negative territory, and so we have taken the step to restrict subscriptions and switches in to the Funds in order to protect existing shareholders from yield dilution…
That’s JPMorgan, explaining why it’s closed five European liquidity-themed funds to new investors, following Thursday’s rate cuts by the ECB. “We wish to restrict growth in assets at this time,” etc. Read more
(That’s Lisa, at Thursday’s European Central Bank press conference) Read more
FT Alphaville had an interesting email exchange with Peter Stella this past week, snippets of which we would like to share (with Stella’s permission).
Stella is currently the director of Stellar Consulting, an organisation that provides macroeconomic policy advice and research to central banks, governments, and private clients. He was formerly the head of the Central Banking and Monetary and Foreign Exchange Operations Divisions at the International Monetary Fund. He has co-authored a number of papers on the topics of money supply, collateral and risk-free assets. Read more
Professor Lew Spellman, from the McCombs School of Business at the University of Texas at Austin, has posted on on what he calls gold’s changing role in the global economic landscape.
Amongst other things, he says the epic hunt for “safe collateral” — which has driven down yields on traditional fixed-income investments in the process — is the direct result of there being too many debt liabilities/obligations relative to safe collateral in the system. Read more
Negative bond yields, negative repo rates, and now… negative freight rates. At least route-specific ones.
Bloomberg has the story here (our emphasis): Read more
Here we go again… hints of a negative rate regime in Switzerland.
But this time it’s not the SNB that’s hinting it, it’s the Swiss government. Read more
FT Alphaville has been keeping an eye on the composition of the Federal Reserve’s US Treasury purchases for a while.
It’s important to watch because the more the Fed buys of any particular issue, the less of a free float is available for everybody else — a fact which may skew pricing or encourage a security’s so-called ‘specialness‘ in the market. Read more
There’s been lots of pondering about the negative five-year Treasury inflation-protected (Tips) rate, but here’s one explanation that strikes us as extremely sensible.
Tips are the best. Read more
FT Alphaville speculated this week about the degree to which collateralised gold loan rates are more indicative of real repo rates - and of collateralised borrowing costs overall – than general collateral repo rates.
That’s because since the re-start of the Treasury’s $200bn Supplementary Finance Program, the opportunity for bills to turn “special” has been reduced massively in the official repo market. Read more
Here’s an interesting view from BarCap on Monday.
As reported before, speculation over whether the Bank of England will cut the remuneration rate for money commercial banks are holding at the central bank is growing. Mervyn King is increasingly being asked about the matter at press conferences. Read more
Remember the hooplah over UK banks hoarding all that lovely QE money instead of passing it into the banking system? Well, the BoE’s Mervyn King said on Tuesday that he was ready to reduce the rate paid on deposits held at the central bank — a la the Swedish example — to make them lend. Read more