Tag Archives: NIRP

Price Discovery, RIP, by David Stockman

Posted on June 30, 2016 | Leave a comment

Once again proving that the world’s economic and financial systems are Rotten to the Core, markets have rebounded quickly from the Brexit vote that was supposed to be the end of the world, fueled by, what else, more sugar from the world’s central banks. From David Stockman at davidstockmanscontracorner.com:

That was quick. With nearly 85% of the Brexit loss recovered in three days and the market now up for the quarter and the year, what’s not to like?

After all, the central banks are purportedly at the ready, and, in the case of the ECB and BOE, are already swinging into action according to their shills in the MSM. MarketWatch thus noted,

Markets were boosted by reports indicating the European Central Bank is weighing changes to its bond-buying program, while “the Bank of England also said they are all in,” said Joe Saluzzi, co-head of equity trading at Themis Trading.

The European Central Bank is considering changing the rules regarding the types of bonds it can buy as part of its stimulus package to amid concerns it could run out of securities to buy under current stipulations, according to Bloomberg News. The report followed comments from Bank of England Gov. Mark Carney, who indicated the central bank is poised to further ease monetary policy to combat

Well now, by the sound of it you would think that the madman Draghi is fixing to uncork the mother of all QEs if there is a danger that the ECB will “run out of securities to buy”.

Who would have thought that the debt engorged governments of the eurozone couldn’t manufacture enough IOUs to satisfy Mario’s “buy” button? In fact, with public debt at 91% of GDP you would think that the $12.5 trillion outstanding would be enough to go around.

It turns out, however, that the operative phrase is “under current stipulations”. In a fit of apparent prudence, the ECB determined that in buying $90 billion of government bonds and other securities per month, it would only purchase securities with a yield higher than its negative 0.4% deposit rate.

That’s right. Stumbling around in their monetary puzzle palace, the geniuses at the ECB determined that subzero rates are just fine with one condition. Namely, so long as they don’t have to pay more to own German bonds, for example, than German banks are paying to deposit excess funds at the ECB.

Stated differently, the ECB apparently determined it will not go broke in subzero land even if it is driving insurance companies, pension funds, banks and plain old savers in exactly that direction.

But then comes the catch-22. The more bonds Draghi promises to buy, the more the casino front-runners scarf-up those same bonds on 95% repo leverage—-knowing that Mario will gift them with a big fat gain on their tiny sliver of capital at risk.

That drives bond prices ever higher and yields lower, of course. At length, the stampede to buy today what Mario is buying tomorrow has driven yields below the negative 0.4% cutoff point for an increasing share of the German yield curve.

To continue reading: Price Discovery, RIP

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NIRP Absurdity Sets Record, Euro Stocks Drown in Bear Market, by Wolf Richter

Posted on June 14, 2016 | Leave a comment

SLL WILL BE ON A BUSINESS TRIP 6/15-6/17 AND WILL NOT BE POSTING. POSTING WILL RESUME 6/18.

If the purpose of NIRP is to do anything other than provide cheap funding and front-running opportunities for speculators, then it is abject failure. From Wolf Richter at wolf street.com:

Glorious times for Draghi’s scheme.

The negative-yield absurdity marked a new and glorious milestone just now: the 10-year yield on German government debt fell below zero for the first time ever. It is currently at -0.03%, bouncing up and down, kissing a positive yield before falling back in to the negative.

German government debt with shorter maturities has been negative for a while. The ECB has just started buying euro-denominated corporate bonds, in addition to government bonds, covered bonds, and asset-backed securities, in an effort to accomplish whatever schemes it has on its agenda. So even some corporate debt with short maturities has been trading at negative yields. But today marked the first time in Europe that 10-year debt has joined the club.

The German 2-year yield is down to -0.59%.

So what does this do for the banks and hedge funds and others who bought these bonds earlier, those that got the word years ago that Draghi would go bonkers and truly do whatever?

The price of a Bund that matures in July 2040 with a 4.75% coupon rose to 202.6 cents on the euro on June 13, according to the Bundesbank, more than doubling the money for investors that had gotten into the game early enough. They’re the real beneficiaries of Draghi’s well-engineered scheme.

Meanwhile, German stocks are in a bear-market, with the DAX down 23.2% from its April 2015 peak. The French CAC 40 is down 21.8%. The Spanish Ibex 35 and the Italian MIB are down 31.4% and 32.6% respectively. So this time around, central banks are lining the pockets very selectively.

But to realize that profit, bondholders have to sell the Bund rather than hanging on to it to collect the coupon and take the risk of getting wiped out later by inflation and/or rising rates. The remaining 24 years is a long time for shit to happen. And if they hold it to maturity, so until July 2040, they will only get 100 cents on the euro. So selling the Bund at the right time is the name of the game.

But no problem. The ECB is buying, and other desperate investors are buying too, even if they get their pockets cleaned out down the road – if this scheme ever unwinds.

And it might not unwind anytime soon. Look at Japan.

Japanese debt is the trailblazer. The bank of Japan invented QE and has run so many bouts of QE that it has named the current Abenomics bout “QQE” to make it sound more powerful than the prior bouts. QE in Japan includes equities with the purpose of propping up Japanese stocks. Alas, the Nikkei is still down ca. 60% from its bubble-peak in 1989. The BOJ has imposed a near-zero-interest-rate policy for two decades, with great success. But in February, it commenced its official negative-interest-rate policy.

So the 10-year JGB yield today dropped to another record low, -0.17% intraday before bouncing off smidgen. Even the 30-year yield is now a minuscule 0.22%. And this in the world’s most fiscally desperate government whose debt now amounts to 250% of GDP, after years of borrowing around 50% of its outlays, thus piling up an ever grater mountain of debt that the BOJ is now eagerly buying.

To continue reading: NIRP Absurdity Sets Record, Euro Stocks Drown in Bear Market

 

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The Effects of a Month of Negative Rates in Japan, by Toru Fujioka and James Mayger

Posted on March 14, 2016 | 2 comments

From Toru Fujioka and James Mayger at bloomberg.com:

The Bank of Japan shocked markets in January with negative rates. The policy had immediate effects on financial markets, even before it actually started on February 16.

Although most analysts don’t expect a change on Tuesday, they are expecting the central bank eventually to cut the rate further. Here’s a look at some effects of negative rates:

About 70 percent of government bonds have a yield of zero or below, meaning investors are paying to hold the debt. Pushing the yield curve down to make borrowing less costly and to encourage lending is the aim of the new policy, according to Governor Haruhiko Kuroda. However, those actions are hurting the bond market, with 69 percent of traders in February saying market function has declined compared with three months ago, according to a BOJ survey.

A 10-year, fixed-rate home loan carried a 0.8 percent rate last week, down from 1.05 percent before the introduction of the negative rate, according to a speech by Kuroda. Japan’s three biggest banks cut their deposit rate to a record low of 0.001 percent, meaning you receive 10 yen (9 cents) in income on a deposit of 1 million yen.

To continue reading: The Effects of a Month of Negative Rates in Japan

 

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Draghi’s Deadly Derangement, by David Stockman

Posted on March 10, 2016 | 1 comment

From David Stockman at davidstockmanscontracorner.com:

Yes, the man is totally deranged, and so is the entire eurozone policy apparatus. Like much of officialdom elsewhere in the world, the ECB is attempting to fight low growth and low inflation with monetary nitroglycerin. Its only a matter of time before they blow the whole financial works sky high.

Low real GDP growth in the eurozone has absolutely nothing to do with the difference between –0.3% on the ECB deposit rate versus the new -0.4% dictate announced this morning; nor does QE bond purchases of EUR 80 billion per month compared to the prior EUR 60 billion rate have anything to do with it, either. The only purpose of such heavy handed financial intrusion is to make borrowing cheaper for households and businesses.

But here’s what the moronic Mario doesn’t get. The European private sector don’t want no more stinkin’ debt; they are up to their eyeballs in it already, and have been for the better part of a decade.

The growth problem in Europe is due to too much socialist welfare and too much statist taxation and regulation, not too little private borrowing. These are issues for fiscal policy and elected politicians, not central bank apparatchiks.

As shown in the chart below, the eurozone private sector had its final borrowing binge during the initial decade of the single currency regime through 2008; debts outstanding grew at the unsustainable rate of 7.5% annually. But since then the eurozone private sector has self-evidently been stranded on the shoals of Peak Debt.

Outstandings have flat-lined for the past eight years—-not withstanding increasingly heavy doses of ECB interest rate repression that have finally taken money market rates into the netherworld of subzero.

To continue reading: Draghi’s Deadly Derangement

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NIRP Kills Off All Money Market Funds in Japan, by Wolf Richter

Posted on March 9, 2016 | Leave a comment

From Wolf Richter at wolfstreet.com:

And the Bitter Irony?

All 11 Japanese asset managers that offer money market funds have stopped accepting new investments into them and are planning to scuttle them after returning their remaining assets to investors. This marks another big accomplishments of negative interest rates.

After years of zero-interest-rate policy, and after gobbling up every Japanese government bond that wasn’t nailed down, the Bank of Japan decided in January to go beyond what had already failed and introduced its negative-interest-rate policy.

As a result of QQE, as it calls its asset-buying program, and the new NIRP, even the 10-year JGB yield is now negative, and yields on shorter maturities are sinking deeper into the negative. Money market funds, which invest in commercial paper and government debt with maturities of less than one year, are at risk of seeing these negative yields eat into their principal.

Money market funds, unlike bank deposits, do not guarantee the principal, but due to their reliance on short-term paper with high credit ratings, they’re considered one of the safest investments, and falling below par value is considered bad form and can trigger runs on the offending fund and neighboring funds by spooked investors.

With an average yield of a record low 0.02% currently – only a hair away from going negative – money market funds are at the verge of systematically falling below par value, not just once, but deeper and deeper, given that the current monetary policy could last for years, or until something big breaks.

Fund managers could absorb the losses, but that’s no fun either. So they’re drawing the line:

The Nikkei:

Nomura Asset Management and Daiwa Asset Management intend to repay investors by August and October, respectively. Mitsubishi UFJ Kokusai Asset Management is preparing to do so in April or May. Five other companies, including Nikko Asset Management, had announced plans as of Monday to return customers’ money.

To continue reading: NIRP Kills Off All Money Market Funds in Japan

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Safes Sell Out In Japan, 1,000 Franc Note Demand Soars As NIRP Triggers Cash Hoarding, by Tyler Durden

Posted on February 23, 2016 | Leave a comment

Who would believe that people would take their cash out of banks rather than pay negative interest rates or throw it at overvalued stocks and bonds? Anybody who doesn’t have an Ivy League degree in economics, that’s who. From Tyler Durden at zerohedge.com:

Negative rates may not have found their way to bank deposits in most locales (yet), but that doesn’t mean the public isn’t starting to see the writing on the wall.

At first, NIRP was an anomaly. An obscure policy tool that most analysts and market watchers assumed would be implemented on a temporary basis in a kind of “let’s see if this is even possible” experiment with an idea that, from a common sense perspective, makes no sense.

But then a funny thing happened. Central banks from Denmark to Sweden to Switzerland went negative and stayed there. They even doubled down, taking rates even more negative and before you knew it, the public started to catch on.

When NIRP failed to resuscitate global growth and trade, the cash ban calls began. The thinking is simple (if crazy): if you do away with physical banknotes, the effective lower bound is thereby eliminated. You can make rates as negative as you like because the public has no recourse as people aren’t able to push back by eschewing their bank accounts the mattress.

If that seems far-fetched, consider that the ECB is seriously considering pulling the €500 euro note and the calls are growing louder for the Fed to drop the $100 bill. Of course officials are pitching the big bill bans as an attempt to fight crime – because only a criminal would pay with a $100. But the underlying push is for a cashless society wherein monetary authorities can effectively force citizens to spend and thereby boost the economy by simply making interest rates deeply negative.

Now that the cash ban calls have gotten sufficiently loud to be heard by the generally clueless masses and now that the likes of Jose Canseco are shouting about negative rates, savers are beginning to pull their money out of the banks.

“Look no further than Japan’s hardware stores for a worrying new sign that consumers are hoarding cash–the opposite of what the Bank of Japan had hoped when it recently introduced negative interest rates,” WSJ wrote this morning. “Signs are emerging of higher demand for safes—a place where the interest rate on cash is always zero, no matter what the central bank does.”

To continue reading: Safes Sell Out In Japan, 1,000 Franc Note Demand Soars As NIRP Triggers Cash Hoarding

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If Zero Interest Rates Fixed What’s Broken, We’d Be in Paradise, by Charles Hugh Smith

Posted on February 17, 2016 | Leave a comment

From Charles Hugh Smith at oftwominds.com:

Rather than fix what’s broken with the real economy, ZIRP/NIRP has added problems that only collapse can solve.

The fundamental premise of global central bank policy is simple: whatever’s broken in the economy can be fixed with zero interest rates (ZIRP). And the linear extension of this premise is equally simple: if ZIRP hasn’t fixed what’s broken, then negative interest rates (NIRP) will.

Unfortunately, this simplistic policy has run aground on the shoals of reality: if zero or negative interest rates actually fixed what’s broken in the economy, we’d all be living in Paradise after seven years of zero interest rates.

The truth that cannot be spoken is that zero interest rates (ZIRP) and negative interest rates (NIRP) cannot fix what’s broken–rather, they have added monumental quantities of risk that have dragged the global financial system down to crush depth:

Crush depth, officially called collapse depth, is the submerged depth at which a submarine’s hull will collapse due to pressure. This is normally calculated; however, it is not always accurate.

Indeed, the risk that has been generated by ZIRP and NIRP cannot be calculated with any accuracy. The sources of risk arising from NIRP are well-known:

1. Zero interest rates force investors and money managers to chase yield, i.e. seek a positive return on their capital. In a world dominated by central bank ZIRP/NIRP, this requires taking on higher risk, as higher yields are a direct consequence of higher risk.

The problem is that the risk and the higher yield are asymmetric: to earn a 4% return, investors could be taking on risks an order of magnitude higher than the yield.

To continue reading: If Zero Interest Rates Fixed What’s Broken, We’d Be in Paradise

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From ZIRP To NIRP – Accelerating The End Of Fiat Currencies, by Alasdair Macleod

Posted on September 26, 2015 | Leave a comment

Imitating insanity is the sincerest form of insanity. Alasdair Macleod raises the possibility that the US central bank will imitate European insanity, at goldmoney.com:

The sudden end of the Fed’s ambition to raise interest rates above the zero bound, coupled with the FOMC’s minutes, which expressed concerns about emerging market economies, has got financial scribblers writing about negative interest rate policies (NIRP).

Coincidentally, Andrew Haldane, the chief economist at the Bank of England, published a much commented-on speech giving us a window into the minds of central bankers, with zero interest rate policies (ZIRP) having failed in their objectives.

Of course, Haldane does not openly admit to ZIRP failing, but the fact that we are where we are is hardly an advertisement for successful monetary policies. The bare statistical recovery in the UK, Germany and possibly the US is slender evidence of some result, but whether or not that is solely due to interest rate policies cannot be convincingly proved. And now, exogenous factors, such as China’s deflating credit bubble and its knock-on effect on other emerging market economies, are being blamed for the deteriorating economic outlook faced by the welfare states, and the possible contribution of monetary policy to this failure is never discussed.

Anyway, the relative stability in the welfare economies appears to be coming to an end. Worryingly for central bankers, with interest rates at the zero bound, their conventional interest rate weapon is out of ammunition. They appear to now believe in only two broad options if a slump is to be avoided: more quantitative easing and NIRP. There is however a market problem with QE, not mentioned by Haldane, in that it is counterpart to a withdrawal of high quality financial collateral, which raises liquidity issues in the shadow banking system. This leaves NIRP, which central bankers hope will succeed where ZIRP failed.

To continue reading: From ZIRP To NIRP

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