One of the features of modern life is the number of official bodies telling us that negative interest-rates are not on their way. For example Bank of England Governor Mark Carney told us this only last week.
I’m not a fan of negative interest-rate. We’ve seen the consequences of them in other financial systems. We have other options to provide stimulus if more stimulus is needed so we don’t need to go to that resort.
Only yesterday The Australian pointed out the view from a land down under.
Reserve Bank governor Glenn Stevens has scoffed at the notion of negative interest rates as a sustainable policy tool, saying “God forbid” Australia ever reached that point.
Actually both gentlemen had of course just taken their respective countries closer to negative interest-rates as we are reminded one more time to note what they do and not what they say! Overnight they have been joined by the Reserve Bank of New Zealand cutting by 0.25% to 2%. If the world economy is doing so well why is everybody cutting interest-rates? After all even Brexit surely cannot be blamed for moves on the other side of the world.
As to those wondering why the Kiwis only cut by 0.25% that is easily explained. The All Blacks had only been defeated in a rugby sevens tournament and larger cuts are reserved for defeats in the 15 a side game.
Negative Gilt yields in the UK
Unfortunately for what remains of Governor Carney’s shredded credibility negative Gilt yields are on the scene now in the UK as described by the Financial Times.
British government bond yields traded in negative territory on Wednesday.
They did so because after the QE debacle on Tuesday investors and funds knew that Calamity Carney would be sending in his buyers to purchase at almost any price, hence the record high prices and record low yields seen. As they bought medium-dated Gilts they drove short-dated Gilts higher and yields around the 2018 to 20 zone went negative. If Governor Carney does not want to face this then may I suggest a tattoo for both eyes!
The M&G Bond Vigilantes put it thus.
For the first time in history, we are seeing negative yields in the UK gilt curve. Two 19s and a 20 now trading with a negative yield.
As these are very hard times to be a Bond Vigilante we can overlook the fact that Gilt yields had in fact briefly gone negative on the day after the Brexit referendum.
Things are likely to get much harder for Governor Carney on Monday as he will be sending in his buyers to buy those Gilts on Monday and this week they avoided that as I explained on Monday. Markets may be waiting for him this time around.
Yields elsewhere are going lower
The Bank of England is adding to a trend we are seeing elsewhere. In addition to new highs for bonds in Australia and New Zealand, Spain saw its ten-year yield drop below 1% for the first time earlier this week. Only the major Euro countries have 2 year bond yields quoted but those that are have one thing in common, negativity. My subject of yesterday France has a -0.44% yield for its 5 year.
This should lead to a surge in investment surely?
Economics 101 and a whole litany of text books tell us this. Accordingly a whole slew of Ivory Towers would come tumbling down if it were not true. Well when the US Federal Reserve published research on this in 2014 ( h/t @edwardnh ) it was not so sure.
Yet, a large body of empirical research offer mixed evidence, at best, for a substantial interest-rate effect on investment.
Further on it was providing evidence that will have all the Ivory Towers moved to Pisa.
Among the more than 500 responses to the special questions, we find that most firms claim to be quite insensitive to decreases in interest rates, and only mildly more responsive to interest rate increases.
The IMF weighs in
There was a time when support from the IMF meant something and indeed it does but the opposite of what it did in the past as we review its disastrous involvement in the economic depression inflicted on Greece. It is in such a light we should review this.
A negative policy rate makes sense……….What has been the track record of the ECB’s negative rate policy—also adopted by other central banks, notably in Japan and Switzerland—after two years? Our paper finds that, so far, it has been successful.
However if you read the detail it has words like “should” and “intended” and it has “contributed to a modest credit expansion” .Nowhere does it outright say it has boosted the real economy. Indeed as we move on from the initial hype I notice this.
However, there are unique challenges to negative rates in the euro area.
in essence the analysis is mostly about the banks ( The Precious) and after telling us why they should be lending more it gives reasons why they might not!
Banks in these countries face reduced margins not just on new lending, but also on existing loans,
Surely if some is good then more is better?
Overall, the ECB has limited room for further substantial rate cuts without hurting the profitability of banks.
suggesting that the benefits from a negative interest rate policy might diminish over time
So we find out quite a lot about the banks and very little at all about the real underlying economy. Perhaps IMF researchers should get out more!
This has been a theme on here for several years now because longer-term business models work increasingly poorly as interest-rates fall before not working at all in a world of negative interest-rates and yields. The Financial Times has now caught up.
The accelerating collapse of yields has widened already substantial gaps in many large pension funds, which use the rates to estimate how much additional funding they will need to meet benefit payments.
This is in one way a particular UK issue but illustrates also a much wider trend. We are back to when Andy Z posted the pensions illustration with one of the rates of return being -3%! What will we do when all of the rates of return have a minus sign? You have £100 now and by investing it for 20 years you can make it £50…..
The Ivory Tower theory is that lower interest-rates discourage saving. This may be true for some but certainly not everyone as the Wall Street Journal highlighted earlier this week.
Lasse Bohman, a 63-year old newsstand worker from Stockholm, said the concept of negative interest rates is “weird” and makes him want to save more for retirement rather than spend. “I am just going to keep on putting money in the bank,” he says, or “put it under the mattress at home.”
In general terms the problem is summed up here.
Some economists now believe negative rates can have an unintended psychological effect by communicating fear over the growth outlook and the central bank’s ability to manage it.
Yes I do. Especially if this story develops.
Word of the day. ‘STRAFZINS’! First German bank to charge negative interest rate to private clients ( h/t @jsblokland )
As the credit crunch has unfolded so many have told us that lower interest-rates will fix the problem. Yet each promise has turned to dust otherwise we would not be where we are and I would like to illustrate this with a tweet I sent out earlier.
If the world economy is doing as well as we are told why is everybody cutting interest-rates?!
Now we have an environment which increasingly includes negative interest-rates. Is there any cure in medicine which requires apparently endless ever higher doses or does that not look more like an addiction cycle? Frankly it looks like what was once described as pushing on a string.
Meanwhile Governor Carney may well be on his way to pushing the UK deeper into this so far bottomless pit. We are regularly seeing members of the Bank of England in the media using Open Mouth Operations to talk down the value of the UK Pound which will put upwards pressure on inflation. Thus with yields now so low the UK will be heading towards the most negative real yields of the major economies all from a man who claims “I’m not a fan of negative interest-rates.”
His Blockbuster looks like this.
Does anyone know the way, did we hear someone say
(We just haven’t got a clue what to do)
Does anyone know the way, there’s got to be a way
Me on Tip TV Finance