Despite popular belief, we take no comfort in the decline in interest rates and argue that it should be viewed as a bad sign.
So says Shyam Rajan of BoAML’s liquidity insight report team, and in so doing echoes the thoughts and sentiments of probably the entire banking industry.
We’ve noted before – channeling Paul Krugman, no less — that zero rates (even more so negative rates) are not a banker’s cup of tea. Indeed, with little capacity to pass negative rates onto customers, the lower for longer scenario compromises hallowed net interest margins, the key source of predictable and sustained revenue for banks. All other services from origination to advisory collect one-off based fees. As great and balance-sheet light as they may be, they’re variable and thus unpredictable, hence inconsistent with the historical reason for buying bank stock. Read more
Nothing to see here:
As of a few days ago (updated to note it went negative for the first time on Friday) the entire stock of Swiss bond yields went negative.
And below the break is the yield curve for future generations to look at and wonder how did it all get so nuts?/ why we ever thought this stuff was weird? Read more
In an alternate universe, central bankers Corbyn, Sanders, and Varoufakis concocted a devious scheme that would both punish the banks for wrecking the global economy and boost public spending in one fell swoop. The trio had hidden their radical leftist views for years as they climbed the ranks of central bankerdom, but now openly instigated a system of financial repression that would rinse the rich and lift up the poor. They slashed interest rates to zero and beyond and watched as the banks died and governments took up the bounty of cheap debt offered unto them:
That’s via UBS. And, of course, we live in the real world, where Corbyn, Sanders and Varoufakis do not lead the main central banks of the western world (even if they did, blaming them for low interest rates would be highly debatable) and where governments don’t seem inclined or able to Do That Fiscal Stimulus Thing®. Read more
Kuroda et al might want to look away:
That’s the yen being “whacked to the lowest since October 2014″ (when the BoJ decided to extend its easing programme) in the words of Citi’s FX team. It’s now under Y109 having been at Y125 in June last year. Also from Citi: Read more
One of the key questions today is about just where we are in the credit cycle, which is more broadly the question of “when’s that debt I bought going to pass its best before date?”
We’re now eight years and counting since the global financial crisis (depending on where exactly you want to pin its beginning) and so there is some nervousness that we’re quite long through the cycle, meaning tougher times are just around the corner — that nervousness, incidentally, has made funding more scarce for online lenders who have largely not been tested through a downturn. Read more
A qualified defense of negative rates effects on banks’ net interest margins, you say?
Go on then.
From Andrew Garthwaite and team at Credit Suisse… Read more
Banks and their decaying NIMs…
Once so great and too big to fail… Read more
By Nomura first, who are worried that Japan’s economy has taken a dangerous turn — what with GDP dropping at an annualised rate of 1.4 per cent in the fourth quarter and Abenomics being felt for a pulse:
You take your data points where you can get them and for negative rates that means, mostly, here:
It’s all a bit messy at the moment — European banks, Japanese banks post the BoJ’s move negative, er other stuff — but it’s not really clear what’s actually going on.
This seems like a decent list of possibilities, from Citi’s Steven Englander:
We think the following concerns are weighing on the market.
1. US economic fragility means there is no one to depreciate against
2. Too many simultaneous issues and policy coordination unlikely.
3. QE/negative rates have lost their financial market impact,
4. QE/negative rates have lost their economic impact
5. QE/negative rates are constrained by bank profits
But his colleague Matt King has a somewhat more involved, if not entirely separate, explanation for what he says is, at the surface, an orderly sell-off but which hides a number of indicators under “extreme stress”.
Basically, it’s all about bank balance sheets coming under pressure. Less basically, he suggests these dislocations “raise awkward questions about the entire narrative which led to the wave of post-crisis bank regulation.” Read more
Imagine someone told you about a country where real output per person is at an all-time high and growing at an increasingly rapid pace, its employment rate is at the highest level in decades, the country’s housing sector is on fire, and its current account surplus is about 6 per cent of GDP. In the absence of other information, would you say this country should be:
- Worried about the costs of a (slightly) higher exchange rate?
- Concerned by the slow rate of (headline) inflation?
- Cutting interest rates deeper into negative territory?
If you answered yes to the above questions, congratulations! You’ve just described the behaviour of the Sveriges Riksbank. From their policy announcement on Thursday (our emphasis): Read more
What must the BoJ be thinking as the yen keeps getting stronger post the Japanese central bank’s announcement of negative rates?
The Riksbank cut its main repo rate by 15 basis points to minus 0.5 per cent as it felt forced to act by “weakening confidence” in achieving its inflation target of 2 per cent – FT, just now
So this seems an appropriate time to rediscuss the idea of a lower bound.
First a quick summary: Negative rates might be destroying the banking system. They might, as Kocherlakota says, be “a sign of a terrible policy failure by fiscal policymakers.” They might simply be a experiment being played out in real time which we are as yet unfit to judge. Read more
We wrote — when talking about the ECB’s potential move to a tiered depo facility which would allow a deeper cut than expected into negative territory on Thursday – that Draghi was in the somewhat relaxed position of being able to follow where other central banks had gone before.
We were of course referring to the Swiss and Danish central banks, which are currently at -75bps versus the ECB’s -20bps and have in place versions of the tiered model being mooted for the ECB.
But… Nomura’s Jens Nordvig thinks we were being too casual in our comparison. The ECB needs to be analysed as its own central bank because: Read more
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
This guest post is from Camp Alphaville speaker Themis Themistocleous, who is head of the European Investment Office at UBS Wealth Management
_______ Read more
Welcome to Bank Underground, the official (and slightly subversive sounding?) Bank of England staff blog.
It’s gone live this Friday, with not one but two inaugural posts touching on topics as far ranging as the impact of driverless cars on the insurance industry to the somewhat wonkish debate over how the ELB (effective lower bound) might one day constrain monetary policy and inflation.
While the BoE isn’t the first central bank to publish staff analysis in blog form– the New York Fed’s staff have been blogging on Liberty Street Economics since 2012 — it is the first that intends to use the medium as a mechanism for self-scrutiny and internal challenge.
As Andy Haldane, the Bank’s chief economist and executive director of monetary analysis and statistics told FT Alphaville this fits with the Bank’s push to make itself more open and transparent. Read more
Might have to pop this at the top, it’s a chart with lots of negative yield stuff on it after all:
Now, as we have said before… friends don’t let friends extrapolate too wildly from the IMF’s COFER data. Read more
We had a hunch back in July 2012 that negative rates, as and when they would surely manifest, would create all sorts of perverse incentives for banks and capital owners.
Notably, our point was, that banks would prefer to lend money to monopoly-minded corporates focused on artificially constraining supply — rather than those focused on improving competition rather or pursuing capex policies. Failing that, a negative rate environment would otherwise create a plethora of zombie corporates propped up with cheap financing, producing output that isn’t necessarily valued much by anyone in the wider world. Read more
The exciting thing about negative rates in the current context is that they make the fundamental ETF, MMF and repo-type structure that lies at the core of central banking much more obvious.
In a negative rate regime the “central bank ETF” essentially clips your rights to the underlying collateral that it holds on your behalf, often, beyond the arbitrage spread a primary dealer can secure. It’s easy for a regular ETF to enforce such a management fee because all its units are electronically registered. All costs, as a result, are distributed equally. If the managing fee is too great, meanwhile, customers would just go elsewhere. Read more
Yes, yes, we should just look away, Bill Gross wants your clicks. But…
It would be pretentious to say that I resembled Honey in any way, but nonetheless she was the puppy I chose. Honey turned out to be a little bit of a tramp, so maybe there’s the connection. Back in the freewheeling ‘80s when society had not even contemplated poop scooping and blue pick-up bags, Honey would roam the neighborhood, depositing wherever she pleased, but bringing things back home in return.
A question worth asking considering the rather large amount of them knocking about at the moment. According to JPM, the total universe of government bonds traded with a negative yield was $3.6tr last week or 16 per cent of the JPM Global Government Bond Index. It’s an answer in itself, really.
Anyway, here’s a list of those willing/ forced to buy those negative yielding government bonds from JPM’s Niko Panigirtzoglou: Read more
It’s a brave new world, even if the idea behind the ever more deeply negative rates being tried out in Switzerland and Denmark isn’t that new at all. Silvio Gesell — Keynes‘ strange, unduly neglected prophet — got there quite a while ago via his eponymous tax. It’s an idea that gets dredged back up every now and then and we’re tempted to do so again here as it neatly frames any conversation about any constraint on how negative these negative rates can get. Read more
What ails Europe is not “secular stagnation” or “normalisation”, but rather the much more specific problem of a “Euroglut”.
So, at least, says George Saravelos at Deutsche Bank.
His argument relates to the idea that the global imbalances which were created by Europe’s massive current account surplus are becoming the defining variables which will drive a weaker euro, low long-end yields and exceptionally flat global yield curves, as well as ongoing inflows into “good” EM assets. Read more
Peter Stella, former head of the Central Banking and Monetary and Foreign Exchange Operations Divisions at the International Monetary Fund, who now heads his own consulting company, is — as ever — on a mission to explain central bank actions for what they really are.
His latest focus area: the real story behind negative interest rates at the ECB.
Critical to understanding the purpose of these, he suggests, is the following chart:
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.
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
Ken Rogoff wades into the negative rate debate this month, in a paper that discusses the costs and benefits of phasing out paper currency — a topic previously explored by Willem Buiter and Miles Kimball (and of course Satoshi Nakamoto).
Among his observations is the somewhat provocative point (at least judging by the replies on Twitter) that…
Paying a negative interest rate on currency, or on electronic reserves at the central bank, may seem barbaric to some. But it is arguably no more barbaric than inflation, which similarly reduces the real purchasing power of currency.
Meaning that a good bout of inflation could be just as good as a negative rate regime. Read more
Look, no minus signs.
Which means an experiment has ended in Denmark, for now. The CD rate rose 0.15 per cent on Thursday.
From the central bank… Read more
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