Might have to pop this at the top, it’s a chart with lots of negative yield stuff on it after all:
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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
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
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 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