Category: Negative interest rates

ROGOFF: The world’s central banks should get ready for negative interest rates in the next recession

BusinessInsider/Will Martin/08-14-17

Kenneth Rogoff, a professor at Harvard University and one of the world’s most prominent economists, said central banks across the globe must start preparing themselves to introduce negative interest rates during the next global recession.

… “It makes sense not to wait until the next financial crisis to develop plans and, in any event, it is time for economists to stop pretending that implementing effective negative rates is as difficult today as it seemed in Keynes’ time,” he said, citing the growth of cashless transactions as a reason to think that negative rates could be implemented more easily in future.

“The growth of electronic payment systems and the increasing marginalisation of cash in legal transactions creates a much smoother path to negative rate policy today than even two decades ago.”

PG View: That “next global recession” is coming . . .

Posted in Central Banks, Monetary Policy, Negative interest rates |

The Greater Moderation

Money Strong/Danielle DiMartino Booth/07-26-17

It’s no secret that the Bank of England, Bank of Japan and European Central Bank have been aggressively flooding their respective economies and in turn, the global financial system, with liquidity in some form of quantitative easing. If there is one lesson to be learned from The Great Moderation, it is that liquidity acts as a shock absorber.

In a less liquid world, the crash in oil prices would have resulted in a bankruptcy bloodbath. In a less liquid world, the bursting of the housing bubble would have led to millions of foreclosed homes clearing at fire sale prices. In a less liquid world, highly leveraged firms would have been rendered insolvent and incapable of covering their interest costs.

In short, a less liquid world would be smaller, for a time. But when the time came to allow nature to take its course, central bankers could not bear the pain, nor muster the discipline, to allow creative destruction to cull the weakest from the herd. Their policies have forced us to pay a dear price to maintain a population of inefficient operators.

So we have one-in-ten firms effectively sucking the life out of the world economy’s ability to regenerate itself. There is no such thing as a productivity conundrum against a backdrop of such widespread misallocation of capital and labor. There is no mystery cloaking the breakdown in new business formation. And there is no enigma, much less any reason to assign armies of economists to investigate, shrouding the new abnormality we’ve come to know as a low growth world.

There is simply no room for an economy to excel when its growth potential is choked off by an overabundance of liquidity that is perverting incentives. What is left behind is a yield drought, one that has left the whole of the world painfully parched for income and returns and yet too weary to conduct fundamental risk analysis.

PG View: This is an excellent essay by former Fed insider Danielle DiMartino Booth. I highly encourage you to read it in its entirety and realize too that, “The Fed’s actions have not saved the little guy; they’ve skewered him.”

Posted in Central Banks, Monetary Policy, Negative interest rates, QE |

The World’s Most Radical Experiment in Monetary Policy Isn’t Working

WSJ/John Lyons & Miho Inada/02-26-17

Japan remains definitively stuck, despite a long and aggressive experiment with ultralow rates. A quarter-century after its property bubble burst, a penny-pinching generation has come of age knowing only economic malaise, stagnant wages and deflation—a condition where prices fall instead of rise.

The belief that deflation will continue has become so ingrained it has presented seemingly insurmountable challenges to monetary policy, a lesson for other countries that are traveling a similar path.

“It is hard to change the deflationary mind-set even with radical policies,” says Frederic Neumann, co-head of Asia economics for HSBC. “I would argue Japan will remain in its funk and will remain there for many years.”

PG View: I would suggest Japan may be stuck indefinitely . . .

So, is the Fed moving ever-so-slowly in the opposite direction in recognition of this harsh reality? Or are they just giving themselves a little clearance above the zero-bound so they can do more if it?

Posted in Central Banks, Monetary Policy, Negative interest rates, QE |

The Japanese yen is tumbling

BusinessInsider/Elena Holodny/12-20-16

The Japanese yen is tumbling after the Bank of Japan kept policy on hold, as virtually all analysts were expecting.

At its Tuesday meeting, the BOJ said it would continue to purchase Japanese government bonds at an annual pace of about 80 trillion yen to maintain a 10-year JGB yield of about 0%.

Interest rates were also left unchanged at -0.1%.

PG View: While this decision was widely anticipated, and Kuroda seemed a little more upbeat on the economy, it seems unlikely the BoJ will take it’s foot off the gas any time soon. This is helping to push the dollar higher and weighing on gold in the process.

Posted in Central Banks, Monetary Policy, Negative interest rates, QE, U.S. Dollar |

BoJ held steady on policy, as was widely anticipated, citing “moderate recovery trend.”

Posted in Central Banks, Monetary Policy, Negative interest rates, QE |

ECB helps send German two-year yields to new low

Financial Times/Dan McCrum & Thomas Hale/12-19-16
German short-term interest rates dropped to a fresh record low on Monday as traders anticipated the effect of New Year policy changes announced by the European Central Bank this month, at a time when market activity begins to ebb in the final days of the year.

PG View: With the ECB poised to start buying assets yielding less than the deposit rate, easing clearly remains the order of the day. Meanwhile, the Fed is tightening, which is creating ever-widening interest rate differentials with the U.S. This is going to perpetuate the detrimental rise in the dollar, which is going to create growth risks.

Posted in all posts, Central Banks, Monetary Policy, Negative interest rates, QE |

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Posted in Central Banks, Monetary Policy, Negative interest rates, QE |

Norges and Riksbank hold steady on rates, maintain dovish guidance. Riksbank statement suggests rates won’t start to rise until 2018.

Posted in Central Banks, Monetary Policy, Negative interest rates |

Economists never imagined negative interest rates — now they’re rewriting textbooks

24-Oct (BusinessInsider) — If you’re a bank, the idea sounds crazy. Why pay someone to hold your cash?

In 1983, when Frederic Mishkin started writing “The Economics of Money, Banking and Financial Markets,” his seminal textbook on macroeconomics, he never thought he’d devote much space to the idea of negative interest rates.

“A million years no,” Mishkin told Business Insider.

Negative rates were seen as a bizarre thought exercise by academic economists, not something any of us would see in the real world.

It was “absolutely unthinkable when I started writing this book,” Mishkin, a former Federal Reserve governor and professor at Columbia Business School, said.

In fact, it took just about 30 years. And as Mishkin finishes the 12th edition of his textbook, he’s devoting a whole lot of space to negative interest rates.

There’s something very shocking about this,” Mishkin said. “I have to talk about how negative rates are something that can be very prevalent.”


Posted in all posts, Central Banks, Monetary Policy, Negative interest rates |

Japan ex-economy minister Takenaka says BOJ to cut negative rates further

05-Oct (Reuters) — Former Japanese Economy Minister Heizo Takenaka said on Wednesday the Bank of Japan will lower its minus 0.1 percent interest rate further to achieve its 2 percent inflation target.

Takenaka, professor emeritus of Keio University and a member of a government panel on investment, told Reuters in an interview that the BOJ’s new policy framework is “orthodox” and it was not necessarily a big change.

As for pushing the rate it sets on some excess deposits that commercial banks park with the BOJ further into negative territory, he said: “The BOJ will do so without doubt.”


Posted in Central Banks, Monetary Policy, Negative interest rates |

Yen Rally Shows Investor Skepticism to BOJ’s Latest Easing Salvo

21-Sep (Bloomberg) — The yen rose against the dollar, reversing the slide that was the initial reaction to the Bank of Japan saying it would adopt a more flexible approach to expanding stimulus.

The Japanese currency’s rebound to a more than three-week high suggests investors are both skeptical officials will achieve their long-term policy goal of boosting inflation and that they’re already shifting their focus to the Federal Reserve’s policy decision later today.

The yen earlier dropped more than 1 percent after BOJ Governor Haruhiko Kuroda and his board said the central bank would move away from a rigid target for expanding the money supply, while seeking to control bond yields across different maturities. They pledged to expand the monetary base until inflation is stable above the authority’s 2 percent target — committing to an overshoot of consumer-price gains.

“We can be more sure that the BOJ wants to reach inflation, but we can be less sure that they are willing, or able, to take the necessary steps,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt. “I would not be surprised if dollar-yen would come down again in the coming days.”

The yen climbed 0.2 percent to 101.47 per dollar as of 7 a.m. in New York, after earlier sliding as much as 1.1 percent to 102.79. It touched the strongest level since Aug. 26.


Posted in Central Banks, Monetary Policy, Negative interest rates, QE |

BoJ launches new form of policy easing

21-Sep (FT) — The Bank of Japan has launched a new kind of monetary easing as it set a cap on 10-year bond yields and vowed to overshoot its 2 per cent inflation target on purpose.

Its decision demonstrates that even eight years after the global financial crisis, central bankers are still willing to experiment with new monetary policy tools as they struggle to escape from low inflation around the world.

The move marks another effort by Haruhiko Kuroda, BoJ governor, to surprise market expectations by expanding his monetary policy toolkit to signal his determination that Japan escape its decades of on-and-off deflation.

But the question for Mr Kuroda is whether three-and-a-half years of slow progress on prices have damaged the BoJ’s credibility too much for promises of higher inflation to be taken seriously by the public.

…The BoJ kept interest rates on hold at minus 0.1 per cent — describing further rate cuts as a “possible option for additional easing” — but announced a new framework with two main elements.

The first is a pledge to cap 10-year government bond yields at zero per cent. In essence, that means the BoJ is promising to buy any bonds offered for sale at that price.

Second, the BoJ has pledged to continue buying assets until inflation “exceeds the price stability target of 2 per cent and stays above the target in a stable manner”.


PG View: Markets seem less-than impressed thus far . . .

Posted in Central Banks, Monetary Policy, Negative interest rates, QE |

Next week’s BoJ board meeting seen as decisive for global bond markets

16-Sep (AFR) — Forget the Fed. All eyes are now firmly fixed on next week’s Bank of Japan (BoJ) meeting for clues as to where global bond and equity markets are headed next.

A global bond sell-off has sent yields on US, Japanese, German and Australian long-term bonds surging this month, after they fell to historic lows earlier in the year. (Yields rise as bond prices fall).

Investors are worried that central banks in Japan and Europe may decide to reduce, or temper their extreme monetary stimulus policies amid mounting evidence that they have failed to bolster either growth or inflation.

Investors are particularly focussed on the Bank of Japan, which for the past 3 1/2 years has been engaged in the world’s most audacious experiment in monetary stimulus experiment – including massive bond purchases and negative interest rates.

But there are growing questions about whether the benefits of these policies outweigh the costs.


PG View: I don’t know that you can really “forget” the Fed, but it’s certainly more likely the BoJ does something next week; like taking rates deeper into negative territory.

Posted in Central Banks, Monetary Policy, Negative interest rates, QE |

SNB leaves rates on hold, issues usual warning on franc and Brexit

15-Sep (FT) — Switzerland’s central bank has kept its interest rates on hold as expected in its latest quarterly decision, and warned that it “will remain active in the foreign exchange market” to try and keep a lid on the franc.

The Swiss National Bank kept the deposit rate at -0.75 per cent.

In a statement, it said:

The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market are intended to make Swiss franc investments less attractive, thereby easing upward pressure on the currency. The Swiss franc is still significantly overvalued. The SNB’s expansionary monetary policy is aimed at stabilising price developments and supporting economic activity.

It also trimmed its 2017 inflation forecast to 0.2 per cent, from 0.3 per cent, and has administered a deeper chop to 2018 forecasts, to 0.6 per cent from 0.9 per cent, while leaving this year’s at -0.4 per cent. That all assumes that interest rates remain unchanged for the whole period.


Posted in Central Banks, Monetary Policy, Negative interest rates |

BOJ to make negative rates centerpiece of future easing: sources

14-Sep (Reuters) — The Bank of Japan will consider making negative interest rates the centerpiece of future monetary easing by shifting its prime policy target to interest rates from base money at its review next week, sources familiar with its thinking say.

The change would underscore growing concerns in the central bank and financial markets over the limits to the BOJ’s economic stimulus efforts, as more than three years of aggressive bond buying is draining market liquidity.

It would also be a shift away from the BOJ’s unique monetary experiment that attempted to crush yields across the curve and try to convince the public that its massive money printing will boost economic activity and prices.

“Among the BOJ’s policy tools, the priority will likely shift more towards interest rates and away from huge bond purchases,” said one of the sources on condition of anonymity.


Posted in Central Banks, Monetary Policy, Negative interest rates |

BOJ to explore delving deeper into negative rates

14-Sep (Nikkei Asian Review) — The Bank of Japan plans to make its controversial negative interest rate policy the centerpiece of future monetary easing, promising to weigh further cuts as expansions to asset buying near their effective limit.

The central bank has pledged a comprehensive assessment of its monetary policy at a two-day meeting starting Tuesday. The BOJ is expected to compile a review concluding that the economic benefits of the minus 0.1% deposit rate announced in January outweigh the side effects. Gov. Haruhiko Kuroda and his deputy governors are unanimous on this point, and are expected to gain support from the majority of the other policy board members.

Some observers had predicted that the bank would use the review as a chance to scrap negative rates in light of objections from the financial sector over diminished profitability. The BOJ instead appears intent on sticking to the policy.

Any decision to take rates deeper below zero will require careful consideration of the yen’s exchange rate and the state of the broader economy. And debate will likely proceed cautiously. “It’s not as though we can keep lowering rates forever,” a BOJ official said.


Posted in Central Banks, Monetary Policy, Negative interest rates |

BOJ studying options to steepen bond yield curve-sources

09-Sep (Reuters) — The Bank of Japan is studying several options to steepen the bond yield curve, say sources familiar with its thinking, as authorities desperately seek out policy tools to revive an economy that has failed to emerge from stagnation despite years of massive stimulus.

BOJ officials have become increasingly wary of the costs of a flattening yield curve, such as hurting bank profits, especially as its controversial decision to adopt negative rates in January has made matters worse.

Bank bureaucrats are brain-storming ways to cut short- to medium-term bond yields, which affect corporate borrowing costs the most, while pushing up super-long yields from undesirably low levels, the sources said on condition of anonymity.

The options might be debated at this month’s rate review as part of measures to fine-tune its massive stimulus programme, they said.

…The BOJ could technically buy foreign bonds from domestic financial institutions and describe the step as aimed at supplying yen liquidity, not weakening the yen. But the amount of foreign bonds held by domestic banks is probably too small to have a sizable impact on the economy, the sources said.

“It would be hard to justify buying foreign bonds when there are many domestic assets still available for the BOJ to buy,” said one of the sources.


Posted in Central Banks, Monetary Policy, Negative interest rates, QE |

ECB steady on rates and QE volumes. in line with expectations, but QE could be extended beyond March 2017 if necessary.

Posted in Central Banks, Monetary Policy, Negative interest rates, QE |

The 5,000-Year Government Debt Bubble

01-Sep (WSJ) — Politicians playing by their own rules is an old story. But it should count as news that politicians have lately been rewriting a rule in place since 3,000 B.C.

This rule of history is that savers deserve to be compensated when they loan money. Not anymore. In much of the developed world lenders are the ones paying for the privilege of letting governments borrow their cash. Through the magic of modern central banking, countries in Europe and elsewhere have managed to drive their borrowing rates not just to historic lows but all the way into negative territory. As of Monday almost $16 trillion of government bonds world-wide were offering yields below zero.

Amazingly, governments have managed this feat even as they have become more indebted and even as slow economic growth undermines their ability to repay. Such conditions normally suggest a less creditworthy borrower and therefore a higher interest rate to compensate investors for the risk. But sovereign debt has become more expensive. Governments have succeeded in making their bonds more expensive in part by printing money and buying the bonds themselves via their central banks. Commercial banks are all but required to buy them too.

In the new political economy—or alchemy—the more unsustainable a government’s finances, the less it pays to borrow. Japan’s government debt amounts to more than 200% of its economy. The yield on Japan’s 10-year bonds recently clocked in at negative 0.06%.

…Put another way, government bonds have never been so expensive. Paul Singer, founder of hedge fund Elliott Management, isn’t expecting a happy ending. He believes that because of massive entitlement promises plus huge debt, “the entire developed world is insolvent.” He says that a negative rate on a government bond is “crazier than zero, and zero was crazy enough.”


Posted in Debt, Negative interest rates |

Janus’s Gross Says Negative Rates Turn Assets Into Liabilities

31-Aug (Bloomberg) — Billionaire money manager Bill Gross said negative interest rates are turning assets into a liability stifling the capitalist system.

In his monthly investment outlook posted Wednesday, Gross, 72, reiterated his long-running criticism of central bankers, including Federal Reserve Chair Janet Yellen, for slashing interest rates to zero or below to help raise asset prices in the hope they will trickle down into the economy. It’s a plan, Gross argued, that will fail to produce sustainable economic growth.

“Capitalism, almost commonsensically, cannot function well at the zero bound or with a minus sign as a yield,” wrote Gross, who manages the Janus Global Unconstrained Bond Fund. “$11 trillion of negative yielding bonds are not assets — they are liabilities. Factor that, Ms. Yellen, into your asset price objective.”


Posted in Central Banks, Debt, Monetary Policy, Negative interest rates |

Negative interest rates are not the drama they seem

by Adam Posen
23-Aug (FT) — Ah, for the good old days of quantitative easing when central bankers agreed what needed to be done to spur economic growth. No longer. In Tokyo, Haruhiko Kuroda, Bank of Japan governor, has just reiterated that he will not rule out a “deepening cut” to the country’s negative interest rates.

In contrast, Mark Carney, Bank of England governor, has announced he is “not a fan of negative rates” and Thomas Jordan, president of the Swiss National Bank, has reaffirmed his belief that its “current approach”, including negative rates, “is the right one”.

Meanwhile, Janet Yellen, chair of the US Federal Reserve, told Congress in May that “while [she] would not completely rule out the use of negative interest rates”, they would be a last resort.

This is too much fuss over just another policy instrument. The drama and division among central bankers reflect two intellectual errors that have distorted monetary policy discussions. These are the same mistakes that led to the demonisation of quantitative easing as “unconventional” and thus dangerous, when in fact it worked pretty much as expected in reducing interest-rate spreads, encouraging riskier asset purchases and adjusting the currency. Negative rates will prove less universally applicable but have also proved predictable and useful in impact.

The first error is believing that the majority of financial decisions will respond significantly to any shifts in government borrowing costs. In pre-crisis days, policymakers assumed that tweaking short-term interest rates was enough to influence all important financial decision-making. This was wishful thinking, based on a couple of decades of atypical US experience. Other economies still needed extra policy instruments, as has the US since the crisis. The absence of stable relationships between credit growth and interest rates, as well as the history of central banking, should have told policymakers and investors that government bond markets were not the only game in town.

…Negative rates are just another monetary policy tool, good for some situations and not for others, with no deep mystery or drama required.


PG View: But this has never happened before and we’re more than 7-years down the road from the end of the U.S. session. NIRP may just be another policy tool, but it seems to be having a limited impact where it has been employed.

Posted in Central Banks, Monetary Policy, Negative interest rates |

Monetary Policy in a Low R-star World

by John C. Williams, San Fransisco Fed President
15-Aug (SF Fed) — Central banks and governments around the world must be able to adapt policy to changing economic circumstances. The time has come to critically reassess prevailing policy frameworks and consider adjustments to handle new challenges, specifically those related to a low natural real rate of interest. While price level or nominal GDP targeting by monetary authorities are options, fiscal and other policies must also take on some of the burden to help sustain economic growth and stability.

As nature abhors a vacuum, so monetary policy abhors stasis. Instead of being a rigid set of precepts, it follows the adage, that which survives is that which is most adaptive to change. Over the past century, monetary policy strategies have evolved in response to changing realities, from the panics and depressions of the late 19th and early 20th centuries that led to the creation of the Federal Reserve to the Great Depression, from Bretton Woods and subsequent battles to contain inflation to the dominance of inflation targeting today (Williams 2014, 2015a).

In the wake of the global financial crisis, monetary policy has continued to evolve, in this latest incarnation battling low inflation and stagnation via unconventional monetary policy actions like quantitative easing and near-zero or even negative interest rates. As we move forward, economic conditions require that central banks and governments throughout the world carefully reexamine their policy frameworks and consider further adjustments in terms of monetary policy strategy—both in its own right and as it relates to other policy arenas—to successfully navigate these new seas.

…In the post-financial crisis world, however, new realities pose significant challenges for the conduct of monetary policy. Foremost is the significant decline in the natural rate of interest, or r* (r-star), over the past quarter-century to historically low levels.

…A variety of economic factors have pushed natural interest rates very low and they appear poised to stay that way. This is the case not just for the United States but for other advanced economies as well.

…The critical implication of a lower natural rate of interest is that conventional monetary policy has less room to stimulate the economy during an economic downturn, owing to a lower bound on how low interest rates can go. This will necessitate a greater reliance on unconventional tools like central bank balance sheets, forward guidance, and potentially even negative policy rates. In this new normal, recessions will tend to be longer and deeper, recoveries slower, and the risks of unacceptably low inflation and the ultimate loss of the nominal anchor will be higher (Reifschneider and Williams 2000). We have already gotten a first taste of the effects of a low r-star, with uncomfortably low inflation and growth despite very low interest rates. Unfortunately, if the status quo endures, the future is likely to hold more of the same—with the possibility of even more severe challenges to maintaining price and economic stability.

To avoid this fate, central banks and governments should critically reassess the efficacy of their current approaches and carefully consider redesigning economic policy strategies to better cope with a low r-star environment. This includes considering fiscal and other policies aimed at raising the natural interest rate, as well as alternative monetary and fiscal policies that are more likely to succeed in the face of a low natural rate.

…Policymakers don’t often cite Machiavelli, but in this instance, the analogy is potent (and, perhaps, a portent). In The Prince, fortune is compared to a river; in times of turbulence it wreaks havoc, flooding and destroying everything in its way. But in calm and sedate weather, people can build dams and stem the tide of destruction. In other words, we can wait for the next storm and hope for better outcomes or prepare for them now and be ready.


PG View
: To me it seems like nobody has done anything to prepare for the next storm, all the central banks have encouraged greater credit expansion and discouraged savings; the very things that got us in trouble in the first place.

Posted in Central Banks, Monetary Policy, Negative interest rates, QE |

Central Banks Could Be This Market’s

15-Aug (WSJ) — The stock market is partying like it’s 1999, and for exactly the opposite reason. Last week the S&P 500, Dow Jones Industrial Average and Nasdaq Composite hit a synchronized high for the first time since the eve of the millennium. America’s most valuable company is a tech stock (Apple today, Microsoft back then). The tech sector is back above a fifth of S&P 500 market capitalization, and just as then bears worry that the market is overvalued, although not by anywhere near as much.

In 1999, wild optimism was elevating the market as investors piled into anything with “.com” after its name—leading to a rash of stock-price-boosting name changes. Investors punished dividend payers for not having enough ways to spend money on transformative tech. The number of clicks beat cash flow as an investment tool.

The contrary is true this year. Wild pessimism about the global economy has led investors to chase dividend payments, demand buybacks and punish companies that invest. Cash is king.

And yet, the market rises. “Nobody seems to be particularly optimistic about much of anything and yet the stock market in the U.S. seems to do nothing but go up,” said Ben Inker, co-head of asset allocation at Boston fund manager GMO.

…“Negative rates to me make no sense,” said Leon Cooperman, chairman and chief executive of New York hedge fund Omega Advisors. Euphoria in the stock market in 1999 has been replaced by euphoria in fixed income in 2016.


PG View: We all know how things panned out for and their silly sock puppet . . .

Posted in Central Banks, Monetary Policy, Negative interest rates |

Are Negative Rates Backfiring? Here’s Some Early Evidence

09-Aug (WSJ) — Two years ago, the European Central Bank cut interest rates below zero to encourage people such as Heike Hofmann, who sells fruits and vegetables in this small city, to spend more.

Policy makers in Europe and Japan have turned to negative rates for the same reason—to stimulate their lackluster economies. Yet the results have left some economists scratching their heads. Instead of opening their wallets, many consumers and businesses are squirreling away more money.

When Ms. Hofmann heard the ECB was knocking rates below zero in June 2014, she considered it “madness” and promptly cut her spending, set aside more money and bought gold. “I now need to save more than before to have enough to retire,” says Ms. Hofmann, 54 years old.

Recent economic data show consumers are saving more in Germany and Japan, and in Denmark, Switzerland and Sweden, three non-eurozone countries with negative rates, savings are at their highest since 1995, the year the Organization for Economic Cooperation and Development started collecting data on those countries. Companies in Europe, the Middle East, Africa and Japan also are holding on to more cash.

Economists point to a variety of other possible factors confounding central-bank policy: Low inflation has left consumers with more money to sock away; aging populations are naturally more inclined to save; central banks themselves may have failed to properly explain their actions.

But there is a growing suspicion that part of problem may be negative rates themselves. Some economists and bankers contend that negative rates communicate fear over the growth outlook and the central bank’s ability to manage it.


Posted in Central Banks, Monetary Policy, Negative interest rates |

BOJ eases policy by doubling ETF buying, underwhelms expectations

29-Jul (Reuters) — The Bank of Japan expanded stimulus on Friday by doubling purchases of exchange-traded funds (ETF), yielding to pressure from the government and financial markets for bolder action, but disappointing investors who had set their hearts on more audacious measures.

The central bank, however, said it will conduct a thorough assessment of the effects of negative interest rates and its massive asset-buying program in September, suggesting that a major overhaul of its stimulus program may be forthcoming.

BOJ Governor Haruhiko Kuroda said the bank was conducting the review not because its policy tools have been exhausted but to come up with better ways to achieve its 2 percent target – keeping alive expectations of further monetary easing.

I don’t think we’ve reached the limits both in terms of the possibility of more rate cuts and increased asset purchases,” Kuroda told reporters after the policy meeting.


PG View: Looks like Kuroda is keeping his powder dry . . .

Posted in Central Banks, Monetary Policy, Negative interest rates, QE |

Gold Poised for Record as Yields Sag, Most Profitable Miner Says

28-The most profitable producer of one of this year’s best-performing commodities says things are about to get a whole lot better.

For investors who missed gold’s climb to a two-year high in early July, it’s not too late to jump in, according to Agnico Eagle Mines Ltd. Chief Executive Officer Sean Boyd. The Toronto-based company’s gross margin of 52 percent last quarter is the biggest among major producers, according to data compiled by Bloomberg. It’s also the only big gold miner to expand the margin over the past five years, the data show.

“I think in this cycle, they will ultimately set an all-time high,” Boyd said in a telephone interview Thursday. Spot gold prices touched a record $1,921.17 an ounce in September 2011. Agnico is laying the groundwork for expanded output through exploration, and Boyd said it’s “one of the very few companies that can see its output 30-40 percent higher in five years from now from stuff we already own.”

Gold has climbed 26 percent this year, with demand for the metal as a store of value rising on global economic-growth concerns and speculation that the Federal Reserve will be slow to raise rates. Purchases of gold as a haven asset have also increased as more than $9 trillion in government debt in developed markets offers yields below zero. Low rates are a boon to non-interest-bearing precious metals.

“There’s still a tremendous amount of debt in the system,” Boyd said. “There’s an inability to create conditions for growth. You’ve got a negative-interest-rate environment, which is a great environment for gold from an opportunity-cost standpoint. And you’ve still got very strong demand coming out of China and India. So all the factors are there that can steadily move gold up.”


PG View: Boyd sees opportunity costs and the negative yield environment as a primary driver for gold . . . just like the Motley Fool article posted this morning.

Posted in Gold News, Gold Views, Negative interest rates |

Citigroup’s Willem Buiter Says ‘Would Hold Gold’

17-Jul (EpochTimes) — In the books of most gold lovers, Citigroup’s chief economist Willem Buiter is noted down as the man who thinks gold is a “6,000 year bubble.”

However, in a recent interview with Epoch Times, he presented a much more nuanced position and said he would even own gold as part of a diversified portfolio of currencies.

“It competes with other fiat currencies, the dollar, the yen, the euro. And if these currencies now yield negative interest rates or are at risk of negative yields in the U.K. and the United States, then the currency that at least has a zero interest rate, looks better.”

…“I will never argue with a six thousand-year-old bubble. So gold, in times of uncertainty and especially in days of uncertainty laced with negative rates looks pretty good,” he said.


PG View: The “six thousand-year-old bubble” comment is just silly, but the rest of Butler’s assessment is accurate.

Posted in Gold News, Gold Views, Negative interest rates |

ECB Fast Exhausting German Bonds for QE Buying as Yields Tumble

19-Jul (Bloomberg) — The European Central Bank’s bond-buying program will be scrounging for German debt within months, according to two of the region’s banks.

The securities that yield less than the ECB’s minus 0.4 deposit rate have grown to more than 60 percent, based on a $1.13 trillion Bloomberg German bond index. That means they’re ineligible for the purchases. Analysts from UBS Group AG and SEB AB are estimating the central bank may run out of German targets within six months, and as soon as August, unless the rules are broadened.

Reaching the precipice would affect a broad range of investors, because a decision by the ECB to open up new groups of bonds for its quantitative-easing program may support their prices even more, helping extend this year’s rally. It’s also significant because German debt is Europe’s benchmark, and it must be bought in a greater proportion than securities from the other euro nations included in the QE program, under current rules.

Euro-area debt has earned more than 5 percent this year, and yields were driven to record lows across the region in recent weeks by investors seeking the safest assets after the U.K. voted on June 23 to break away from the European Union. That sparked market turmoil and renewed concern about the outlook of the global growth.


PG View: As quality bonds become unavailable, the ECB will pickup the slack by loading up on more junk…

Posted in Central Banks, Monetary Policy, Negative interest rates, QE |

When Narratives Go Bad

by W. Ben Hunt, Ph.D.
07-Jul (Epsilon Theory) — Here’s my most basic view on everything that’s happening in the world right now, politically, economically, socially … all of it: the Fix is still in, but it’s getting harder and harder to maintain.

The Fix is the status quo, and it goes by different labels of identity depending on what you’re talking about. “European Union” is one of those labels. “Central Banking” is one. “Clinton” is another. They aren’t real things at all, but are statements of shared identity that channel our behavior in highly predictable patterns that are, in turn, highly useful to The Powers That Be, and are maintained by expressions of Common Knowledge such as “everyone knows that everyone knows that Brexit was a grievous mistake” or “everyone knows that everyone knows that low interest rates spur the economy.” Those expressions of Common Knowledge are also called Narratives, and the Narratives are dying.

And yes, I know that this all sounds suspiciously philosophical and divorced from our investing reality, but bear with me for a moment, because the punchline here is going to be that I think what I’m describing is the ONLY thing that matters for our investing reality. Our reality is not determined by the antics of the flesh-and-blood Hillary Clinton or Donald Trump, but by the status quo ideas and institutions represented by and threatened by the human-shaped cartoons we call “Hillary Clinton” and “Donald Trump”. To figure out what’s next for markets, we have to figure out why “Clinton” – shorthand for globalism (it’s not called The Clinton Global Initiative for nothing) and a sort of technocratic, condescending, principle-less, democracy-suspicious manner of governing – is failing. We have to figure out why Bill Clinton’s stroll across the Phoenix tarmac to chat up the Attorney General was a) reported at all, and b) greeted by derision and despair within his own party. If you don’t like my use of the label “Clinton” or if you think I’m being too political, replace it with “Brussels” or “Beijing”. It’s all the same thing, just three different shades of gray.

…Put these two income squelchers together – zero wage income growth because corporations aren’t investing for growth and less-than-zero investment income growth because Central Banks have crushed rates – and you have a vast swath of the voting public in every developed nation on Earth that (rightfully!) feels aggrieved and left behind by the gleaming economic recovery that the status quo Narrative Missionaries tout at every turn.


PG View: This piece by Ben Hunt makes a nice addendum to today’s DMR.

Posted in Central Banks, Economy, Monetary Policy, Negative interest rates, QE |

Negative yielding sovereign debt rises to $11.7tn globally

29-Jun (FT) — Global government debt with negative yields has increased by more than a trillion dollars since the end of May after the UK’s Brexit vote sent investors scrambling for safe haven assets.

The amount of sovereign debt with negative yields, meaning if investors hold the bonds to maturity they will get back less they put in, was $11.7tn on Monday, a rise of $1.3tn since the end of May, according to data from Fitch Ratings.

Frenzied demand for high-rated government debt in the wake of Great Britain’s vote to part ways with the EU have sent sent yields a swath of haven bonds plumbing new lows.

“Worries over the global growth outlook, further fueled by Brexit, have continued to support demand for higher-quality sovereign paper in June,” Fitch said.

Strikingly, debt of increasingly long maturities has fallen into negative-yielding territory, with the level of bonds with maturities of seven years or more swelling to $2.6tn from $1.4tn at the end of April.


Posted in Debt, Negative interest rates |