Get ready for negative interest

[Gone4Good]

Im with you Runningman, but I am a bit self serving. If GoneforGood can get me a negative rate mortgage, I am switching sides!

Be careful what you wish for.

 

[samclem]

As a practical matter, I expect stock prices to rise if US interest rates go negative (because demand for equities will increase if people must effectively pay a fee to leave their money in debt instruments). If that happens, I will take advantage of the one-time windfall in equity prices and draw down my stock holdings >significantly< while awaiting the eventual collapse. The question is--what to do with the money? At that point, preserving its buying power will be a lot more important than seeking real gains.

 

[Nemo2]

No-one has (yet) mentioned companies paying negative dividends and/or negative dividend reinvestment plans (where the longer you hold a position the smaller it gets).

 

[Gone4Good]

The market does not clearly want it, governments clearly want . . .

There's too much in your comment to respond to point by point. I'll just note that when the Fed stopped buying bonds treasury rates did not spike the way everyone making your argument thought they would.

The evidence is pretty clear. Fed bond buying did not "artificially" lower long rates.

Currently 10-year treasury rates are about 125bp lower today than they were when the Fed began "tapering" its last QE purchases in late 2013 and they're about 60 bp lower than when the Fed bought their last bond in October 2014.

So the markets have spoken. And they really do want lower rates.

 

[Gone4Good]

How is a bank to utilize a negative interest rate on a house? ...

The same way they do at any other time. They borrow money at a lower rate than they lend at. What's the problem?

 

[Senator]

Yet the cost of services (paying anybody to do anything) continues to rise. What gives?

There is a shortage of people willing to do any work. Therefore, prices go up.

 

[Big_Hitter]

The same way they do at any other time. They borrow money at a lower rate than they lend at. What's the problem?

if you have a loan with a negative interest rate, then the lender pays you interest on the principal

if the bank has negative interest bearing accounts, you pay them interest

so I think it's extremely doubtful that lenders will issue loans at negative interest rates...banks charging for holding cash - that's been going on for a while now

 

[Running_Man]

The idea that Central Bank purchases of bonds is not creating the zero interest rates and instead is a free market desire while ---- Europe buys 60Billion Euros a month of bonds, India, Sweden, Japan and China all continue to buy.

 

[Gone4Good]

The idea that Central Bank purchases of bonds is not creating the zero interest rates and instead is a free market desire while ---- Europe buys 60Billion Euros a month of bonds, India, Sweden, Japan and China all continue to buy.

Um, yeah, but the Fed stopped buying treasuries (as per your chart) and treasury rates declined.

Moreover, treasury rates are significantly lower now than they were during QE1, QE2 AND QE3 when the Fed was an active buyer.

China has been a net seller of treasury bonds lately as has Japan. The ECB buys Euro debt, not treasuries.

And yet treasury bond rates go down.

Sorry, don't buy your argument that low long-term rates are due to central bank purchases.

Edit to add: Taking a closer look at your chart, the only Central Bank adding to its holding on your chart is the BOJ. The Fed has been on hold since 2014 and the BOE holdings have actually declined. So what's your point again?

 

[Big_Hitter]

interesting if we have a negative yield curve... that would explode corporate pension liabilities

 

[Fermion]

interesting if we have a negative yield curve... that would explode corporate pension liabilities

And state/local pensions too. 8% assumed return in this environment? LOL

 

[pablo]

The evidence is pretty clear. Fed bond buying did not "artificially" lower long rates.

Currently 10-year treasury rates are about 125bp lower today than they were when the Fed began "tapering" its last QE purchases in late 2013 and they're about 60 bp lower than when the Fed bought their last bond in October 2014.

While incorrect, your point is understandable but is missing an important element: The Fed has NOT bought their last bond. The 'end' of QE meant that they aren't buying bonds to further expand their balance sheet. But with a $4T balance sheet the Fed is still, every day, buying MASSIVE amounts of Treasuries and Agency mortgages propping up their prices. According to my former trading desk colleagues (not everyone can FIRE!) the Fed is still the single largest player in the enormous Treasury and
mortgage bond markets.

 

[NYEXPAT]

I am under the belief that while the Fed stopped QE, it continues to roll over it's treasuries as they mature.

To the point of the thread. The Fed announced a while back what it will do under three different stress test scenario's. As things are moving quickly towards their most dire model, I think NIRP is already baked in the cake.

 

[Mulligan]

I am under the belief that while the Fed stopped QE, it continues to roll over it's treasuries as they mature.



To the point of the thread. The Fed announced a while back what it will do under three different stress test scenario's. As things are moving quickly towards their most dire model, I think NIRP is already baked in the cake.

That is what I heard her say yesterday, before her monotone voice got the best of me.


Sent from my iPad using Tapatalk

 

[pablo]

I am under the belief that while the Fed stopped QE, it continues to roll over it's treasuries as they mature.

To the point of the thread. The Fed announced a while back what it will do under three different stress test scenario's. As things are moving quickly towards their most dire model, I think NIRP is already baked in the cake.

Yes, the Fed is 'rolling over' their maturities but it's not quite that simple. As they have a very active book of Treasuries and Agency mortgage maturities they use these maturities tactically each day depending on how the yield curve looks while simultaneously attempting to keep their duration neutral. The Fed is constantly reaching out to large trading desks, the largest fixed income managers (think of one rhyming with 'RIMCO'), and other large institutional investors so as to stay out of the way of other large trades or to amplify these trades if it suits them. How do I know this? Was part of my old j*b!

 

[pablo]

Sorry, I'm having trouble learning how to quote prior posts. I'll figure it out eventually, I suppose.

 

[Gone4Good]

While incorrect, your point is understandable but is missing an important element: The Fed has NOT bought their last bond. The 'end' of QE meant that they aren't buying bonds to further expand their balance sheet. But with a $4T balance sheet the Fed is still, every day, buying MASSIVE amounts of Treasuries and Agency mortgages propping up their prices. According to my former trading desk colleagues (not everyone can FIRE!) the Fed is still the single largest player in the enormous Treasury and
mortgage bond markets.

I agree there is a stock vs. flow question in determining the Fed's impact on asset prices. But replacing maturing bonds isn't exactly the same thing as "buying MASSIVE amounts of [bonds] propping up their prices."

But even so, Treasury yields are still lower than when the balance sheet expansion ended. Are you suggesting that maintaining the Fed balance sheet at its current size drives yields down further than expanding the balance sheet did? Because that is what is required to explain the persistent decline in treasury rates.

Meanwhile, the Treasury Department has issued nearly $1T in net new debt since the Fed stopped adding to it's portfolio. And rates continue to decline. Is that somehow the Fed's doing too, even through their balance sheet has shrunk in size relative to the overall market?

Clearly something else is happening in the market that can't be explained by the Fed's balance sheet.

 

[pablo]

My opinion is that the Fed does not want long rates to decline to the extent that they have. But they are now fighting uphill against currency traders and that doesn't usually end optimally. The Fed's current purchases don't help and neither does Yellen's poorly worded comments on negative rates.
Long Treasury rates usually spend time in trading ranges. But when they move they MOVE! And apparently they are now on the move.
So I believe you are correct that there are other factors involved (currency traders, other Central Banks buying US Treasuries, energy producing countries buying, large macro hedge funds buying Treasury futures). But the Fed keeps buying too, even though it is not in their interest to do so.
My opinion, of course, is entitled to be wrong!

 

[Gone4Good]

A simpler explanation is that there is an excess demand for safe assets like treasury bills and cash. And there's an excess demand for those assets because their yield is held above the market clearing level because interest rates can't break through the 0% price floor.

If the world is fearing deflation. 0% deposits are actually a positive yielding asset. The larger the deflation, the higher 0% deposits return and the larger the miss match between borrowers and lenders and other competing investments becomes.

Negative interest rates help fix that problem by removing the arbitrary price floor so markets can clear.

 

[jim584672]

Who is willing to pay someone to hold their money? And have the risk involved with a loan?? Makes no sense and can't work.
People will just hoard physical cash.

 

[Gone4Good]

Who is willing to pay someone to hold their money? And have the risk involved with a loan?? Makes no sense and can't work.
People will just hoard physical cash.

If you're talking about a couple hundred bucks, I'd agree. Keep it in your pocket.

But what if you had maybe a trillion in assets, like a bank? Mason jars in the back yard?

 

[jim584672]

If you're talking about a couple hundred bucks, I'd agree. Keep it in your pocket.

But what if you had maybe a trillion in assets, like a bank? Mason jars in the back yard?

Well banks have vaults, so get the notes and put them in the vault, problem solved.

 

[samclem]

If you're talking about a couple hundred bucks, I'd agree. Keep it in your pocket.

But what if you had maybe a trillion in assets, like a bank? Mason jars in the back yard?

Is there enough paper currency in existence to physically represent the US money supply? I always figured the M1 number was entirely electronic, with a relatively token amount of physical notes in existence.

 

[Gone4Good]

Well banks have vaults, so get the notes and put them in the vault, problem solved.

Not exactly a cost free solution. So while that may limit how negative rates can go before large holders start building Fort Nox style bunkers for their cash, it doesn't exactly prevent negative rates at lower levels.

 

[MichaelB]

Is there enough paper currency in existence to physically represent the US money supply? I always figured the M1 number was entirely electronic, with a relatively token amount of physical notes in existence.

No. FRB: How much U.S. currency is in circulation?

How much U.S. currency is in circulation?

There was approximately $1.39 trillion in circulation as of September 30, 2015, of which $1.34 trillion was in Federal Reserve notes.