Tag Archives: negative interest rates

Negative-Yielding Bonds Jump to Almost $12 Trillion

Bloomberg, Oct 3, 2016

The unprecedented worldwide surge in the market for bonds that are certain to lose money if held to maturity regained strength last month.

The total face value of negative-yielding corporate and sovereign debt in the Bloomberg Barclays Global Aggregate Index of investment-grade bonds jumped to $11.6 trillion as of Sept. 30, up 6.1 percent from a month earlier. That sum had fallen for two months in a row from June’s $11.9 trillion peak.

Demand for the safety of high-quality bonds pushed up the totals in all but two of the 13 countries with more than $100 billion in negative-yielding debt. Italy’s tally shrank by 9 percent to $361 million and Denmark’s expanded more than a third to $104 million.

Japan, where policy makers moved in last month to coax yields up, remains ground sub-zero with almost $6 trillion, about half of the global total. Western Europe accounts for 47 percent, the bulk from France, Germany, the Netherlands, Spain and Italy.

Less than a seventh of the world’s negative-yielding debt is owed by businesses. Finance companies issued the bulk of those corporate bonds, almost 80 percent, with original face values totaling $1.3 trillion.

Sovereign and corporate debt totals include both new negative-yielding issues and bonds with prices that rose enough to push their yields into the money-losing zone. The Bloomberg Barclays Global Aggregate Index has a market capitalization of $48 trillion and includes investment-grade debt from 24 developed- and emerging-economy markets.

The benchmark gauge does not include maturities of less than a year, which tend to have lower yields, so the value of many short-term less-than-zero bonds aren’t counted in this story. Because the totals are based on as-issued amounts, they also don’t take into account a small amount of buybacks.


Negative Rates for the People Arrive as German Bank Gives In

Bloomberg, Aug 12, 2016


When the European Central Bank introduced a negative interest rate on lenders’ deposits two years ago, few thought things would ever go this far.

This week, a German cooperative savings bank in the Bavarian village of Gmund am Tegernsee — population 5,767 — said it’ll start charging retail customers to hold their cash. From September, for savings in excess of 100,000 euros ($111,710), the community’s Raiffeisen bank will take back 0.4 percent. That’s a direct pass through of the current level of the ECB’s negative deposit rate.

“With our business clients there’s been a negative rate for quite some time, so why should it be any different for private individuals with big balances?,” Josef Paul, a board member of the bank, said by phone on Thursday. “As it looks today, charges on deposits won’t be extended to customers with lower amounts” than 100,000 euros, he said.


Raiffeisen Gmund am Tegernsee may be a tiny bank that’s only introducing penalties to well-off customers — it says fewer than 140 will be affected — but in principle the ECB’s negative deposit rate was meant to encourage spending and investment in the euro area’s sluggish economy, not to tax thrifty Bavarians. A spokesman for the Frankfurt-based central bank declined to comment.

Indeed, introducing the sub-zero policy in June 2014 with a cut to the deposit rate to minus 0.1 percent, ECB President Mario Draghi said the move was “for the banks, not for the people.” Should banks decide to transmit the reduction to savers then that’s their decision. “It’s not us,” he said.

Since then, the ECB has chopped its deposit rate — what banks pay to park excess funds overnight — three more times. So far, policy makers have said there haven’t been any serious negative side-effects, such as customers withdrawing their cash and stashing it elsewhere. In that time, amid a moderate recovery, bank lending has returned to growth.


The risk for ECB policy makers now is that negative rates begin filtering through to the real economy while growth and investment is still sluggish, bringing the downsides of the policy without the upsides. Euro-area growth slowed in the second quarter, data released Friday show, leaving it vulnerable to any fallout from the U.K.’s vote to leave the European Union.

In that environment, lenders in Europe regularly complain — and the ECB has acknowledged — that negative rates depress their profitability. Some are already charging corporate clients with large deposits. The Bundesbank estimated last year that the low-rate environment would cut the pretax profit of German banks by 25 percent by 2019.

Retail Taboo

But only two weeks ago, ECB board member Benoit Coeure said retail customers were staying with their banks because of signs they wouldn’t be charged for their savings any time soon.

“Deposits of both households and non-financial corporations have been growing over the past two years, at a similar pace to the period before we entered negative interest-rate territory,” he said in a speech on July 28. “Rates on retail deposits seem to have a zero lower bound.”

Whether Coeure is essentially right — that Gmund am Tegernsee’s Raiffeisen is a rare case and on a broader scale the rates for ordinary depositors won’t go below zero — may depend on how lenders in Germany and elsewhere respond to the taboo on charging retail clients.

Michael Kemmer, head of the Association of German Banks, said in a statement on Thursday that he doesn’t expect others to follow suit.

“It’s up to each bank whether and how to charge for deposits,” he said. “The competition between banks and saving banks in Germany is much too strong.”


Fed’s Yellen says negative rates would need careful consideration

Marketwatch, May 13, 2016


Federal Reserve Chairwoman Janet Yellen said Tuesday the Fed wouldn’t rule out using negative interest rates to boost the economy but she cautioned such a move would have to be carefully studied.

“While I would not completely rule out the use of negative interest rates in some future very adverse scenario, policymakers would need to consider a wide range of issues before employing this tool in the United States, including the potential for unintended consequences,” she wrote in a letter to Rep. Brad Sherman (D., Calif.) and released by his office.

Yellen also wrote she expected the economy would strengthen and inflation would return to the Fed’s 2% target “over time.”

“If the economic outlook evolves in an unexpected way, the Federal Reserve will adjust the stance of policy appropriately to foster progress toward its long-run goals of maximum employment and stable prices,” she wrote.

(An extended version of this story can be found at WSJ.com)



El-Erian: Why negative interest rates are so damaging

CNBC, Apr 18, 2016


The longer negative interest rates persist, the greater the damage to the world financial system, Allianz Chief Economic Adviser Mohamed El-Erian said Monday.

With “low and even” world growth, “you’re going to see central banks, particularly in Japan and Europe, try to do even more to boost their economies, said El-Erian. “The system isn’t build to operate with negative nominal rates.”

Negative rates prevent services such as insurance companies and pensions to get the yields they need to thrive, not to mention the chilling effect negative rates have on savers, he said on CNBC’s “Squawk Box.”

“We’re going to have an impaired financial system,” he said. “It means fewer long-term financial services that are credible for society.”

El-Erian also cited a high political risk to negative rates: “That’s something people can identify with. It looks absurd. What do you mean, I’m going to lend to my money and I’m going to pay you interest? Give me a break.”

Leaders in Japan and Europe need to get their fiscal houses in order to take pressure off central banks, he said.

“Central banks are like doctors, they never walk away from the patient,” El-Erian said. “Even though they haven’t got the right medicine, they will continue prescribing.”

Besides the economy, another major theme at the spring meetings of the International Monetary Fund and World Bank this weekend was the concern about wildcards like the June vote in the U.K. on whether Britain should leave the European Union trading block.

El-Erian also said he was not surprised Sunday’s meeting of major oil-producing countries in Doha failed to lead to an output freeze.

It was shocking that oil traders had hoped for an agreement, he said, referring to last week’s nearly 8 percent rise in West Texas Intermediate crude, the American benchmark.

The lack of a deal among OPEC and non-OPEC producers was the result of distrust among the participants, El-Erian said, predicting oil prices would remain volatile and hover around current levels of about $38 per barrel.

“We are going to put this [no deal] behind us quite quickly,” he said. “We are seeing supply destruction going on. We’re seeing some pickup in demand. And traders are getting used to the new reality of pricing, which is a little more volatile but … doesn’t indicate long-term trends.”


Central banks will never admit they’ve run out of ammunition, but they have

MarketWatch, Mar 30, 2016

Forget helicopter money. It won’t work.

The big bazookas are loaded. The attack helicopters are fueled up and ready to fly. The arsenal is fully equipped with new and terrifying weapons, the like of which you have never seen before. It is perhaps no surprise that central bankers are increasingly resorting to military metaphors to describe their battle against deflation.

They way they see it, they are fighting a war, and, just like generals in the field, their tactics are as much psychological as economic.

Over the last few weeks, in the wake of the latest of the latest round of extraordinary policy measures from central banks in both Europe and Japan, senior officials have spent a lot of time telling the markets that they still have plenty of ammunition left in the locker.

The trouble is, they would say that, wouldn’t they? Just as a general will never own up to running low on guns and ammo, even if in reality he is, so a central banker is never going to fess up to running out of tools to get the economy growing again.

And yet the truth is very different. They have. They will discuss lots of new ideas, from dropping money from the sky to re-basing currencies. But none of them are likely to work. Very soon it might be better to admit that.

If you went into 2016 thinking central banks had done everything they could do keep prices rising and growth moving forward, the year so far has proved you wrong.

First of all, the Bank of Japan joined European central banks, including Sweden and Switzerland as well as the European Central Bank, in imposing negative interest rates. Soon afterwards, ECB President Mario Draghi rolled out yet another “big bazooka,” taking the main rate down to zero, imposing deeper negative rates elsewhere, and increasing the monthly rate of quantitative easing.

Are they finished yet? Heck no. You or I might think they had thrown everything they could at the problem, but as it turns out we’d be wrong. Soon afterwards, the ECB’s chief economist Peter Praet gave a widely publicized interview in which he said there could well be more interest-rate cuts down the line, and possibly “helicopter money” as well.

Every other central bank has been keen to push the same message, and a range of academic economists have started popping up with ever more bizarre suggestions about how policy makers could stimulate their economies even further.

Of course, you can see what they are up to. No one ever wants to admit they are out of options. They have to keep up the pretence that there is something more than they can do. But that doesn’t mean they are right. You only have to pause and look at how weird and bizarre some of the suggestions are to realize how hollow they actually are.

Negative interest rates have now been imposed on roughly a third of the global economy, but if anyone out there thinks they are great success they are keeping themselves well hidden.

So far they seem to have backfired. They have destroyed the profitability of the banks — so much so in Europe that there were even fears about the stability of the mighty Deutsche Bank earlier this year. It is hard to understand how you can have a healthy economy without a healthy banking system.

Worse, no one thinks you can keep cutting into negative territory. A minus 5% rate on bank deposits? A minus 10% negative rate? Surely everyone can see that people will just use cash instead, or gold bars, or bitcoins — any sort of money that doesn’t lose value just by holding it.

Next up, “helicopter money” is getting a lot of discussion. The economist Milton Friedman famously put forward the idea that central banks could literally drop money into the economy, as if they were throwing it from a helicopter. But how is it actually meant to work in practice?

Take Europe for example, since Praet is actively discussing the possibility. Would the ECB simply deposit, say, 1,000 euros in everyone’s bank account? What about the people who don’t have bank accounts. According to McKinsey estimates, 8% of people even in high-income countries are unbanked. Since they are the probably the poorest members of society, it seems unfair to them to miss out.

Or will someone go round with a bundle or notes? Worse, how do we know that they will actually spend the money, rather than just pay off debts — which would of course defeat the whole purpose of the exercise. The more you think about the practicalities of the proposal, the less and less serious it seems.

There are even stranger ideas out there. There has been plenty of commentary about the idea of banning cash to make negative rates more effective. But how do you stop people creating an alternative? After all, the reason we still use bank notes is because they are useful. One British economics professor recently floated the idea of re-denominating the currency — that is, the old one would be withdrawn and a new one issued.

Others have flirted with debt cancellation — what you owe would simply be written off. It’s all good fun for people who enjoy that sort of thing. But serious policy? Not really.

It is no good just telling people you have plenty of ammunition left in your arsenal. At a certain point, you actually need to say what it is, and explain how it will work.

And if you can’t? It might be better to say that central banks have done what is possible to stimulate their economies, and that it is now up to governments to do their bit, either with expansionary fiscal policy, or structural reforms, to make their economies more competitive. Sooner or later, they will work that out for themselves anyway — and they won’t thank you for lying to them.