Get ready for negative interest

[pablo]

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

[Gone4Good]

Quote:

Originally Posted by pablo 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]

Quote:

Originally Posted by 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.

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]

Quote:

Originally Posted by Gone4Good 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]

Quote:

Originally Posted by Gone4Good 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]

Quote:

Originally Posted by jim584672 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]

Quote:

Originally Posted by samclem 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?

Quote:

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.

[jim584672]

The Treasury can start issuing those trillion dollar platinum coins they were talking about and we never have a deficit again! Small down side, loaf of bread, $1,000,000.

[Big_Hitter]

Quote:

Originally Posted by 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.

that's why there aren't any negative interest chapters in actuarial textbooks

[Mulligan]

Quote:

Originally Posted by 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.

I agree your background basis and theory are correct. But...Here is the question I don't understand... By numerical data anyways, the economy is not that bad to do that drastic of measures is it? If we stepped back in time away from immediate moment, and looked at this data, I doubt anyone would be mentioning negative rates would they? We have had historically real deflationary times and negative rates were never used. Are we pushing on a string? If it worked, would it just front load any future growth, and cause more problems down the road? I certainly don't have the answers...


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[samclem]

Quote:

Originally Posted by MichaelB No. FRB: How much U.S. currency is in circulation? Quote: 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.

And the Fed says there are about $8T in total deposits, IIRC about 1/4th of that is in retail banks. So--no, we really can't all get our money in cash if we want it, there aren't enough notes.

[Big_Hitter]

I thought state street was already charging negative interest to institutional clients - wasn't that in the wsj late last year?

[Big_Hitter]

Quote:

Originally Posted by samclem And the Fed says there are about $8T in total deposits, IIRC about 1/4th of that is in retail banks. So--no, we really can't all get our money in cash if we want it, becasue there aren't enough notes.

the panic of 2016!

[samclem]

Quote:

Originally Posted by Mulligan But...Here is the question I don't understand... By numerical data anyways, the economy is not that bad to do that drastic of measures is it?

But we're part of a larger system. Once the other big currencies (euro, yen) go into negative rate territory, it induces big currency flows into the USD (because depositors can at least store their money in the world's most secure banks and not pay for the privilege). A stronger US currency kills our export business and it causes deflation and all the bad things that go with that ("don't buy today--wait for later when things will be cheaper"). So the idiocy of others drives us into the same crazy swamp.

[Running_Man]

Quote:

Originally Posted by samclem But we're part of a larger system. Once the other big currencies (euro, yen) go into negative rate territory, it induces big currency flows into the USD (because depositors can at least store their money in the world's most secure banks and not pay for the privilege). A stronger US currency kills our export business and it causes deflation and all the bad things that go with that ("don't buy today--wait for later when things will be cheaper"). So the idiocy of others drives us into the same crazy swamp.

Exactly! And the Japan Central bank is purchasing in excess of 100% of issuance,

As for if the Fed purchases affect current prices, with 20% of treasury debt in their possession, what would happen if the Fed decided to buy 20% of the inhabitable houses in the US and then stopped their purchases at that point? Would we say there was then a free market in housing with the US government holding 20% of the stock?

[Mulligan]

Quote:

Originally Posted by samclem But we're part of a larger system. Once the other big currencies (euro, yen) go into negative rate territory, it induces big currency flows into the USD (because depositors can at least store their money in the world's most secure banks and not pay for the privilege). A stronger US currency kills our export business and it causes deflation and all the bad things that go with that ("don't buy today--wait for later when things will be cheaper"). So the idiocy of others drives us into the same crazy swamp.

I should have mentioned maybe its fair we lag behind other countries in their race to the bottom since we started the whole thing. We got ours, so now its their turn. It appears dollar has been fading a bit lately anyways...Maybe just jawbone it down more and not act?


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[Another Reader]

Negative interest rates? Time to deleverage. Paying off my rental mortgages is looking like a nice guaranteed return at this point. Don't let the bank take your money, pay off all debt with a rate higher than zero. Only have the minimum cash in the bank needed to get by, and buy a new mattress to hoard the cash on hand at home.