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... As WSJ reports, Tuesday marked another milestone in the topsy-turvy world of monetary easing in Japan: The Bank of Japan bought short-term Japanese government debt at a negative yield for the first time. ...
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According to Australia's ABC News, the "Federal Government looks set to introduce a tax on bank deposits in the May budget."
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... the Bank of Japan ... unleashed the monetary neutron bomb of Negative Interest Rates in the process pulling an anti-Draghi and shocking markets, even if admitting it can no longer boost QE due to previously discussed concerns it would run out of monetizable bonds in the very near future.
The initial market reaction was one of shocked surprise, with the Yen crashing and risk soaring, subsequently followed by disappointment that QE may be now be officially over and the BOJ will be stuck with negative rates, and then euphoria once again regaining the upper hand if only for the time being as yet another central banks does all it can to levitate asset prices at all costs, even if in the long run it means even more deflationary exports from all other banks and certainly China which will now have to retaliate against the devaluation of its "basket" of currencies.
The BOJ's excuse was simple: everyone else is doing it: as Kuroda said quickly after the NIRP announcement, the BOJ’s monetary policy is “just the same as central banks in the U.S. and Europe,” and “doesn’t target currencies.” Well, it does target currencies, but he is right: it is the same as policy in Europe and the US, where as a reminder, NIRP is coming next.
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The world’s longest experiment with negative interest rates may end up lasting an entire decade.
Not until 2021 at the earliest will Danes have a chance to see positive rates again, according to Danske Bank. The country’s policy rate first dropped below zero in 2012.
Danske Bank senior analyst Jens Naervig Pedersen says last year’s pattern of krone depreciation, which had some economists predicting rate hikes, won’t continue. In fact, he expects the Danish currency to appreciate in 2019. And with the central bank’s sole purpose being to defend the krone’s peg to the euro, a stronger exchange rate makes monetary tightening in Denmark less likely.
Nowhere else have people lived with negative interest rates as long as in AAA-rated Denmark. The policy has protected the currency peg, but it’s also turbo-charged the mortgage market and pushed those trying to save money into riskier assets. Meanwhile banks have done a bit less traditional lending and a lot more wealth management.
The jury is still out on the extent to which negative rates are a useful policy, especially in economies in which the central bank targets stable prices rather than fixed exchange rates. This week, former U.S. Treasury Secretary Lawrence Summers threw his hat into the ring, criticizing the policy because of its apparent failure to stimulate bank lending “due to a negative effect on bank profits.”
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Former U.S. Treasury Secretary Lawrence Summers has jumped into the debate about negative interest rates, signing onto a paper that gives the policy -- adopted in Europe and Japan as an emergency tool during the financial crisis -- a damning review.
Negative central bank rates have not been transmitted to overall deposit rates, and a model suggests that tiptoeing into negative territory in a world with such a disconnect is “at best irrelevant, but could potentially be contractionary due to a negative effect on bank profits,” Summers writes with Brown University’s Gauti Eggertsson and Ella Getz Wold and Norges Bank’s Ragnar Juelsrud.
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While Eggertsson and his co-authors have released prior iterations of this research, Summers is newly appearing as a co-author. That’s relevant, because the Harvard economist is an influential voice in monetary policy circles and has a track record of urging the policy makers to contend with a low-growth, low-interest rate future.
The commentary on negative rates could be well-timed for impact: while the policy has never been used in the U.S., the Federal Reserve is embarking upon a yearlong conversation about its monetary policy framework.
Because research from Fed Board economists shows that America’s policy rate could be around zero about a third of the time going forward, unconventional monetary policies are almost sure to factor prominently in the central bank’s future toolkit. That said, Fed staff looked at negative rates back in 2010 and were unsure if the central bank had the legal authority to impose them.
Summers and his co-authors point to quantitative easing, forward guidance, and credit subsidies as potential alternatives to negative rates as better solutions to fighting a recession with interest rates near zero.
“Our findings suggest that negative interest rates are not a substitute for regular interest rate cuts in positive territory, at least to the extent that these cuts are expected to work via the bank lending channel,” the economists write. “While the existing literature has made progress in evaluating these measures, the question of how monetary policy should optimally be implemented in a low interest rate environment remains a question which should be high on the research agenda.”
Swedish inflation unexpectedly slowed in January, adding to speculation that the central bank may struggle to end four years of negative interest rates as planned this year.
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The Swiss National Bank can lower its subzero interest rates even further, President Thomas Jordan told newspaper Blick.
In the interview, Jordan affirmed the ongoing need for a deposit rate of minus 0.75 percent plus a pledge to intervene in currency markets, if necessary, adding the franc remains highly valued. The SNB had the tools to act, he said, should economic conditions deteriorate.
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The SNB’s interest rates are the lowest of any major central bank and are designed to keep pressure off the franc, which is regarded as a safe haven at times of market uncertainty. A strengthening franc depresses the inflation rate in Switzerland.
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Negative Central Bank Rates since...
Eurozone (ECB): Jun 2014
Switzerland: Dec 2014
Sweden: Feb 2015
Japan: Jan 2016
Europe’s unconventional experiment with negative interest rates to spur economic growth and inflation is looking like a trap.
Five years into what was supposed to have been a temporary shot in the arm for the euro area, the European Central Bank still hasn’t achieved its goals and may be about to push rates even lower. Japan, Switzerland, Sweden and Denmark have also stepped over the zero bound, once seen as the lower limit for monetary policy.
With global economic growth slowing, negative rates are staying around. But the longer they persist, the louder the criticism grows. They’re blamed for weakening banks, expropriating savers, keeping dying companies on life support, and fueling an unsustainable surge in corporate debt and asset prices.
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As top Wall Street banks warn of zero Treasury yields and falling income from lending, their European peers have been dealing with negative rates for half a decade, with an end looking increasingly far off. The drought has left them without a cushion to fall back on when income from trading dries up, as it did in the first half, and it’s one reason why once-mighty Deutsche Bank AG just announced the most radical cuts yet to its investment bank.
The second quarter will probably provide more evidence how damaging zero or negative rates are for an industry that at its core depends on clients paying to borrow money. Revenue at eight of Europe’s top lenders is set to decline 2.7% on average from a year earlier, according to filings and analyst estimates. ...
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Here’s a guide to what investors will be looking for when the top lenders start to report on Tuesday:
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It is no longer absurd to think that the nominal yield on U.S. Treasury securities could go negative. Last week the German 30-year government bond yield dipped into negative territory for the first time ever. Around $14 trillion of outstanding bonds worldwide, or 25% of the market, now trade at negative yields, according to Bloomberg. What was once viewed as a short-term aberration – that creditors are paying debtors for taking their money – has already become commonplace in developed markets outside of the U.S. Whenever the world economy next goes into hibernation, U.S. Treasuries – which many investors view as the ultimate “safe haven” apart from gold – may be no exception to the negative yield phenomenon. And if trade tensions keep escalating, bond markets may move in that direction faster than many investors think.
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Taken together, recent developments have increased the odds, in our view, that a “mid-cycle adjustment” of the fed funds rate similar to the mid and late 1990s (when the Fed cut rates three times) may not suffice to stabilize growth, but that last Wednesday marked the beginning of the next major Fed easing cycle. To be sure, so far this is only a possibility rather than a probability. But if the Fed cuts rates all the way back down to zero and restarts quantitative easing, negative yields on U.S. Treasuries could swiftly change from theory to reality.
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Highlights from Jim Bianco at Bianco Research.
Key Points
- Negative debt topped $15 Trillion today on Monday, up over $1 Trillion in two business days.
- Negative debt is now 27% of all developed country sovereign debt, a new record.
- Negative debt now 44% of of all developed countries excluding US sovereign debt.
Excluding US
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The head of the Reserve Bank has told Parliament that all options are on the table to stimulate Australia's economy, potentially even cutting interest rates to zero or negative levels and implementing unconventional policies such as quantitative easing.
This week, four countries — New Zealand, India, Thailand and the Philippines — cut their official rates, with more nations expected to follow over the next few weeks.
That follows the first US Federal Reserve rate cut in more than a decade at the end of July.
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In Denmark’s $495 billion mortgage-backed covered bond market, another milestone was reached on Wednesday as Nordea Bank Abp said it will start offering 20-year fixed-rate loans that charge no interest.
The development follows an announcement earlier in the week by Jyske Bank A/S, which said it will start issuing 10-year mortgages at a coupon of minus 0.5%. Danes can also now get 30-year mortgages at 0.5%, and Nordea recently adjusted its prospectus to allow for home loans up to 30 years at negative interest rates.
“It’s never been cheaper to borrow,” Lise Nytoft Bergmann, chief analyst at Nordea’s home finance unit in Denmark, said in an email. “We expect this to contribute to driving home prices higher.”
Though good news for homeowners, Bergmann said the development is “almost eerie.”
“It’s an uncomfortable thought that there are investors who are willing to lend money for 30 years and get just 0.5% in return,” she said. “It shows how scared investors are of the current situation in the financial markets, and that they expect it to take a very long time before things improve.”
U.S. President Donald Trump on Wednesday called on the “boneheads” at the Federal Reserve to push interest rates down into negative territory, a move reluctantly used by other world central banks to battle weak economic growth that risks punishing savers and banks’ earnings in the process.
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The ECB cut its deposit rate further into negative territory, decreasing it by 10 basis points to negative 0.5%, while also announcing it would restart its monthly bond-buying program as it attempts to juice inflation and European expansion.
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The cash cow bank lending model is dead, buried by the European Central Bank (ECB).
The coup de grace came at the recent meeting. As ECB President Mario Draghi squeezed the negative interest rate for banks even deeper.
The ECB will restart its bond purchase program in November. This time, without a time limit. Thus, the monetary authorities have permanently chained the long-term interest rate at a low level and cut the profit opportunities of the financial sector to a level that isn't sustainable.
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"The negative interest rate policy of the ECB is ruining the financial system and is a socio-political poison," says Frank Kohler, CEO of Sparda-Bank Berlin. The financial system is absurd if we have to explain to the children that money has a negative value - and thus debt is good, because you may not have to repay everything.
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Negative interest rates have quite literally broken one of the pillars of modern finance.
As economists and central bankers weigh the pros and cons of sub-zero rates and their impact on the world, traders have been contending with a rather more mundane, but fundamental issue: How to price risk on trillions of dollars of financial instruments like interest-rate swaps when their complex mathematical models simply don’t work with negative numbers.
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Tuomas Malinen said:...
So, what negative rates do is seriously impair the profitability of the banking sector, foster the creation of “undead” companies, kill productivity growth and deform financial relationships. They may be the single most destructive form of monetary policy ever invented.
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Unicredit, Italy’s biggest lender, is working on measures to transfer the European Central Bank’s negative rates onto clients holding more than 100,000 euros ($110,000) in their accounts, Chief Executive Jean-Pierre Mustier said on Wednesday.
The ECB last month cut rates deeper into negative territory as part of monetary stimulus aimed at reviving an ailing euro zone economy, nearly a decade after the bloc’s debt crisis.
In particular, the ECB’s deposit rate was reduced by a further 10 basis points to -0.50%.
Mustier, who chairs the European Banking Federation, said in an interview with French TV channel BFM Business that “negative rates have a significant impact on European banks’ revenues”.
To counter this, banks “can transfer negative rates case by case onto big companies or some big clients”, Mustier said, describing such clients as those with deposits of more than 100,000 euros. He did not elaborate.
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Negative interest rates are "essential" for the Swiss economy and will not be reversed without a significant change in global economic conditions, Thomas Jordan, head of the Swiss National Bank, warned today.
Mr. Jordan's remarks come amid mounting concern in Switzerland that the country's nearly five-year long rate-setting experiment -- aimed at curbing the appreciation of the franc and protecting exports -- is beginning to create severe structural problems.
The SNB's benchmark rate, set at minus 0.75 percent, is the lowest of any central bank in the G10 economies. Yields on 10-year Swiss government bonds have been negative for almost a year.
Some economists have warned that the policy distorts capital allocation in the economy, artificially skewing investors' and consumers' perceptions of risk in subtle but potentially substantial ways. Banks' margins have shrunk dramatically, while cheap credit has begun to inflate asset prices in some parts of the economy. ...
UBS Group AG is considering whether to impose fees on a wider group of savers as it seeks to share the burden of negative interest rates.
The Swiss bank is approaching clients holding less than the 2 million Swiss francs ($2.1 million) about paying for their deposits, people with knowledge of the matter said, asking not to be identified discussing private talks. That’s the current threshold at which charges currently kick in at the lender.
“We are following developments closely and generally recommend that clients consider alternatives to cash,” UBS said in an emailed statement. “UBS still does not intend to charge negative interest rates to small savers or small businesses.”
UBS has so far set a relatively high bar for passing on the pain. Zurich-based rival Credit Suisse Group AG also charges clients with cash deposits of more than 2 million francs. Some retail lenders in Germany charge for deposits of more than 100,000 euros ($112,000) and Switzerland’s PostFinance AG sets the bar at more than 250,000 francs.
Negative rates were a main reason that UBS dropped its net new money target in January. UBS started a program this year to encourage clients to move out of cash into investments that are better protected from negative rates.
If depositors don’t want to make those changes, UBS will consider charges “and it’s possible that they move their cash elsewhere,” Chief Financial Officer Kirt Gardner said on a call with analysts in January. “We are working through the details of that program and will announce more within the first quarter.”
Moving clients into investments may have become a harder sell after stocks dropped the most since the financial crisis last week, hurting investment portfolios.
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Investors are now betting the U.K. will join the negative-rates club by the end of December.
Spurred by Bank of England Chief Economist Andy Haldane’s comments that the institution is looking at unconventional monetary policies -- including negative rates -- more urgently, overnight interest-rate swaps for December’s meeting dropped below 0% for the first time.
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Market pressure on the U.S. and the U.K. to cut rates below zero is growing with the coronavirus continuing to weigh on economic output. Still, officials are reluctant to make the move, citing risks that a negative interest-rate policy stifles bank profitability, and harms the economy more than it helps.
Morgan Stanley has also expressed such concerns, arguing in an emailed note that both Japan and the euro area -- which have rates in negative territory -- have seen greater underperformance of stocks, economic growth, loan growth and bank valuations than the U.S.
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U.S. banks have long looked with pity at overseas lenders coping with negative interest rates. Now, they’re grappling with the fear they may join the crowd.
Negative rates -- especially if they persist for many years -- reduce the spread banks make between lending and borrowing because they cannot pass the negative rate onto most depositors. Coupled with surging defaults due to an economic downturn, they can sap profits out of the banking system even if they create an initial jump in lending. That toxic combination has crippled Europe’s banks in the last six years, a dreaded position their U.S. peers would like to avoid.
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