The world of negative interest-rates and yields continues to expand

Friday afternoon saw another nexus point in the development of negative interest-rates and yields. The US Employment Report saw not a few apparent contradictions but as a headline the non farm payrolls or NFP number was net negative. What I mean by that was downward revisions to past months at 59,000 were higher than 38,000 jobs created in May. This was awkward to say the least for all the US Federal Reserve members who has been jawboning via Open Mouth Operations about an interest-rate rise this month. A case of foot in mouth for a few! This brings us to a theme of this blog which is that promised interest-rate rises are either non-existent as in the Forward Guidance of the UK’s Mark Carney or are way underpowered like in the US. What I mean by the latter is that we started 2016 with promises of 3-5 interest-rate rises this year but as of today have seen none at all.

Interestingly such news does not seem to have reached the UK Prime Minister.

David Cameron has warned that mortgages could rise for millions of homeowners if Britain votes to leave the EU.

The Prime Minister has said average repayments could rise by nearly £1,000 a year because leaving Europe could lead to tighter credit controls as well as pushing up interest rates.

That was a bit awkward for Bank of England Governor Mark Carney as isn’t that what he has promised via his Forward Guidance? But if we look at financial markets we see that such rhetoric is in fact from a universe far,far away. Of course things may be different on June 24th whatever the result of the UK Referendum but these days interest-rates do not seem to rise even when it is supposed to be policy for them to do so.

Negative Yields

Fitch Ratings have upped the ante of the size of this problem.

The global supply of long- and short-term sovereign securities yielding less than zero now nears $10 trillion, constraining the ability of banks, insurers and other sovereign investors to generate fixed-income returns.

They had in fact provided a critique to the words of David Cameron if you substitute UK Gilts for US Treasuries in the sentence below.

One possible implication of a growing stock of negative yielding debt is increased demand for higher-yielding government securities like U.S. Treasuries, which could keep long-term yields low,

They also point out why this is a problem.

The total amount of negative yielding government debt stood at $9.9 trillion ($6.8 long-term and $3.1 short-term) globally as of April 25, 2016. This debt currently yields negative 24 basis points (negative $24 billion) annually. If historical rates were available today, the same securities would have yielded 1.23% ($122 billion) using 2011 yields, and 1.83% ($180 billion) using 2006 yields.

That is quite a lot of money taken out of the system as we see yet another side effect of QE (Quantitative Easing) style policies. These side-effects continue to build up but advocates invariably just mimic Agent Smith from The Matrix series of films and cry “More! More!” You see the problem would be solved in the economic models at the rarified heights of their Ivory Towers meanwhile below the clouds reality for plebs like us is rather different. So far 2016 has seen an extra US $4 trillion or so of negative-yielding government debt and lest we forget the advent of negative yielding corporate debt as well.

Meanwhile even the Japanese seem to be turning ever more Japanese.

Japan accounts for 66% ($6.5 trillion) of the total outstanding negative yielding debt, bolstered by the BOJ’s negative rate policy and increased purchases of Japanese government bonds.

Also more Italian government bonds are at a negative yield now.

More Negativity

The response to Friday’s US Employment Report was for world bond prices to rise overall and therefore for yields to fall further. The obvious link was to the US Treasury Bond market where the 2 year yield has become something of a proxy for interest-rate expectations and is now 0.79%. Now you can say that the official US interest-rate is 0.38% ( Fed Funds) or 0.5% (the target) but whichever you choose there is scope for a rise of 0.25% but not much more over the next 2 years. At the opening of 2016 as the Federal Reserve made its interest-rate promises it rose to 1.1%.

Bond markets like to flock together so you will not be surprised to read that this had implications elsewhere. From Nordea Markets and the emphasis is theirs.

the dismal employment number resulted in a sharp drop in the 10Y Bund to end the day at 6.7bp.

There are arguments as to whether this is a closing low for yields and high for prices but you get the idea if you think of 0.067%  a year for ten years. A grim outlook if you are willing to accept that. But this has other consequences if we look elsewhere in Germany’s bond market. It has a negative yield out to 9 years or over 70% of the market and the yield on the 5 year Bobl is so low that even the ECB will no longer buy it although of course it remains a back stop at -0.4%. I note ( h/t @YanniKouts) that we are seeing another side effect or unintended consequence of QE.

Spanish and Italian banks refrain from providing loans to the economy and increase purchases of German Bunds ~

Just for clarity that is exactly the reverse of the message from the Ivory Towers as we note yet again that central banking policy always helps the banks. Let’s face it the Italian banks do need a lot of help or as it is officially put they are “resilient”.

If we move to the UK then the 10 year Gilt yield closed the week at 1.28% which is very close to a record low for it. Nobody apparently told Prime Minister David Cameron as of course if it stays there we can expect even more record lows for mortgage rates. The 5 year Gilt yields 0.74% as opposed to the 2.1% when Bank of England Governor Mark Carney promised higher not lower Bank and hence mortgage rates with his Forward Guidance. Up is indeed the new down for him.

Is financial advice from Bank of England Governor’s and indeed Prime Ministers subject to miss-selling rules?


The advent of negative interest-rates was something which was supposed to be temporary just like zero interest-rates or ZIRP. Whereas in reality just like the 0.5% emergency Bank Rate in the UK which has lasted over 7 years they look ever more permanent. For example we were told that Denmark would be moving away from them as 2015 moved to 2016 whereas I note this today from Bloomberg.

Most private-sector forecasters don’t expect Denmark’s central bank to go positive again until 2018 at the earliest

Also we have an official denial of problems from the Governor of the Nationalbanken.

There’s no sharp, disruptive movement when you pass below zero.

Regular readers will be aware that official denials invariable spell in Taylor Swift speak “trouble,trouble,trouble” and once we are past the official denials we see my themes appear.

Conversations in Copenhagen these days turn quickly to real estate.

Really? Why?

There’s no question negative rates have driven up the price of owning a piece of this urban vitality. Apartment prices per square meter soared 43 percent between the start of 2010 and the end of 2015, according to real estate broker Home; in early May the International Monetary Fund urged the government to rein in Danish house prices.

We see sign of estate agents having been busy with “urban vitality” a bit like calling some of Battersea, South Chelsea or how Stockwell is in urban myth St. Ockwell. So first-time buyers of property in Denmark will have seen “disruptive movement”. Oh and this made me smile.

Real estate players also argue that Danes, temperamentally, are a risk-averse bunch—especially with memories of a 2008 property crash still fresh

Please run me by how they had a crash then?

There is more.

DSV…found itself in a tricky situation in November, when it sold 5 billion kroner ($750 million) of shares to fund a takeover of rival UTi Worldwide. Short of renting a huge vault, that meant sitting on most of the proceeds at negative rates until the deal was finalized in January, at a cost of about 4 million kroner.

The Wall Street Journal notes that in fact low interest-rates may have caused problems perhaps they might send a copy to the Governor of the Nationalbanken.

Why Aren’t Low Rates Working? Blame Dividends
Since the Federal Reserve took rates to near zero, companies have boosted buybacks 194%.

Lest we forget

On this day in 1944 my grandfather amongst others was on a trip to Germany via France.

13 thoughts on “The world of negative interest-rates and yields continues to expand

  1. Great blog, Shaun, as always.
    Bank of Canada Governor Stephen Poloz gave the Doug Purvis Memorial Lecture at the 2016 annual meeting of the Canadian Economics Association at the University of Ottawa yesterday. Here is a link to the audio of his speech and the question and answer session that followed:
    At about the 41:30 mark he answers a question from McGill University professor Chris Ragan and brings up the issue of negative interest rates. He said that about a third of the public debt in the world is at negative interest rates.
    I asked a question about the reform or replacement of the BoC’s CPI excluding indirect taxes (CPIXT) at the 37:30 mark. It is much inferior conceptually to the ONS’s constant-tax CPI, and quite undocumented. The whole question-and-answer session has been omitted from the videotape of the speech, something I can’t ever remember happening before. Whatever the explanation is, it does give the appearance of a crude form of censorship. By the way, the section on the upcoming renewal of the inflation control agreement at the BoC website don’t even mention the possibility of reforming its dysfunctional CPIXT series.This was something Mark Carney should have cleaned up five years ago with the 2011 renewal agreement but did nothing about, and it seems it is still not part of the BoC’s todo list.

    • Hi Andrew
      It seems that nefarious activity
      I just read that Yellen is about to
      make a rate rise comment with no mention
      of the coming months.Does that ring any


      • Thank you for your reply, JRH. I didn’t know what you mentioned about Janet Yellen, but forward guidance seems to have fallen out of favour. The lovely and charming Simon Fraser University economist Luba Petersen recently gave a presentation in Ottawa of a paper she had written with Oleksiy Kryvtsvov:

        Click to access Experimental_KP_2015.pdf

        (He is a very bright young Bank of Canada economist, who I know slightly from a work term he did at Statistics Canada.) They did laboratory experiments, indicating “that public announcements of the future course of monetary policy may be detrimental to macroeconomic stability.” I asked her specifically if a path for future bank rate hikes like Chair Yellen had set out in December was a good idea, and she said that it definitely wasn’t. Nick Rowe, a Carleton University professor who sits on the CDHI Monetary Policy Council, said that the takeaway message from her talk seemed to be that the only thing the central banker had to tell the public was “two percent” and forget about everything else.

    • Hi Andrew and thanks

      I am pleased to hear you calling the Bank of Canada Governor to account :). By the way it is now on the tape and he looked rather shifty to me. So he is the very definition of modern central banker…….

      • You’re right, Shaun. The video now includes the question and answer period, like the audio tape. Thank you so much for telling me. I never would have thought to see if they had added it to the tape myself.

  2. Hello Shaun ,

    There definately something wrong here

    seems we’re still giving life support to the Banks via the back door , or is this really for Governments?

    I cant see ever normal interest rates returning here in my life time . A while back I posted this wasn’t like like the 1930’s , more of a 1870’s 30 year recession – maybe I’m right ( for once !)

    The question remains though not of how do we unwind this but what happens if we/they don’t , because so far it seems “painless” to the pollies . but our kids and our pensions are being wasted / destroyed by these thoughtless actions……

    For what ?

    So big Government borrows money these days and has to pay less than the principle back ?

    am I right ?

    but I cannot do the same …… hmmm


    • Hi Forbin

      This one goes the most to governments many of whom are being paid to issue debt which is rather extraordinary especially if you look at the economic circumstances. This will probably make little or no difference.

      “Livesquawk ‏@Livesquawk 5h5 hours ago
      Rating and Investment Information lowers ratings on Japan government bonds from stable to negative –Nikkei”

      Yes the abandonment of the next Consumption Tax rise should make a difference. Welcome to QE for governments! Along the way it helped the banks as they sold off profitable bond holdings and/or booked profits.

  3. hello shaun

    lets also not forget VJ day as well on August 15th , Although my dad was in Singapoor his brothers were in Europe with the RAF .

    As for WWI granfather was in Gallipoli before being posted to Basra with the RFA . Some never saw the trenches but fought all the same.


    PS: on the financial front apparently the pound dropped on a few polls on the EU , something that we wanted anyways?

  4. Hi Shaun
    Great blog Shaun,I am amazed at your
    stamina are you a long distance runner!
    Song for “The sound of Silence Carney” If you
    haven’t seen this before a scary bloke with a good voice
    giving a great performance.


    • Hi JRH and thanks

      I have long thought that this song has amongst the best opening lyrics.

      “Hello darkness my old friend
      I’ve come to talk to you again”

      I am not sure I want to know what state of mind Paul Simon was in then but I am grateful for the result.

  5. I see a bubble, a bond bubble, a sovereign and corporate bubble, much like the housing bubble of 2007, only I see another one of those too.

    The only question is how long can the establishment delay the bust via alternative monetary policy and what will rates be like the other side of the bust? Outer space probably, also, will global stock markets necessarily fall when bond markets do or will they become the next bubble as all that bond money looks for a new home?

    • Hi Noo2

      I noted someone earlier wondering if the was a spaceship in orbit using the infinite improbability drive of Douglas Adams. As to interest-rates we are approaching the time when a friend and ex-colleague’s charts always suggested that the interest-rate cycle would turn sharply. Hopefully we will both be around to see if he was wrong or right!

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