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Every Government In The EMU Will Soon Be Paid To Borrow
With Monday set as the day the ECB will embark on an ill-fated crusade to monetize the entirety of euro fixed income net issuance twice over, inquiring minds want to know how long it will be before yields on all EMU government bonds fall into negative territory.
Here’s WSJ:
The yields on bonds issued by one-time trouble spots including Spain, Italy and bailout recipient Portugal struck record lows on Friday. Short-dated Irish bond yields fluctuated around 0% and Spanish two-year bonds dropped to around 0.08%.
Traders and investors often position for well-flagged monetary policy shifts in advance, pulling back once details are released, but in the case of the ECB’s bond-buying program, that hasn’t materialized.
“We could see the two-year Spanish, Portuguese and Italian bonds yields falling below zero in coming months,” said Azad Zangana, a European economist at Schroders , which has about £300 billion ($455 billion) of assets under management.
“It is only a matter of time,” said Nick Gartside, chief investment officer for fixed income at J.P. Morgan Asset management, with $1.7 trillion under management. “We’re still big buyers of debt in those countries.”
Alberto Gallo, head of macro credit research at Royal Bank of Scotland , said that the restriction of only buying debt yielding more than minus 0.2%, will likely generate even more demand for long-term debt in southern Europe, in contrast to elsewhere in the region, “since many core countries already trade very close to the no-buy zone.”
Oh, how far we’ve come in three short years. Recall that in mid-2012, many periphery governments were priced out of the debt market altogether and yet now, not even 34 months on, these same countries are being paid to take investors’ money. Not only has the market been stripped of its ability to serve as a price discovery mechanism, it has been destroyed altogether.
In this environment there is virtually no question that in short order, everything that’s not tied down in the eurozone will be monetized and will trade with a negative yield. In fact, we’ve been headed that way for quite some time as the following chart shows:
… and as you can see from the following, the core is well on its way towards being paid for each and every piece of government guaranteed paper they care to issue with nearly half of bonds issued by Germany, Finland, the Netherlands, and Austria already trading with negative yields…
Here’s where it gets particularly interesting. Yesterday, Mario Draghi virtually guaranteed the ECB will soon operate from a position of accounting insolvency by pledging to buy €1.1 trillion in bonds at a weighted average price of 124% of par.
Buying above par effectively means the ECB will only have to buy 80% of the number of bonds it would otherwise have to buy to hit its monthly targets (a way of silencing critics who claimed the central bank wouldn’t be able to locate enough assets). It also means that should periphery sovereign spreads suddenly blow out (i.e. begin to price in 2012-like redenomination premia due to a deterioration in Greece or a Podemos victory in Spain), balance sheets engorged with EGBs will incur massive losses plunging the ECB into a negative equity position.
Central banks will generally counter the accounting insolvency argument by claiming they plan to hold the bonds until maturity and thus will not actually realize any losses. However, if you drive yields so low that every issue you’re chasing sports a negative yield, you can no longer use that argument. That is, buying bonds with a negative yield and holding them to maturity guarantees a loss. It’s quite difficult to see how this ends well.
Bought a European bond with a money-losing yield? Don't worry, the ECB will buy it from you
— zerohedge (@zerohedge) March 5, 2015
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This is not right...
...Looks like the beginning of Hyper inflation.
Print money to fund production and there will be no hyper inflation.
Besides, you can always cancel the money via asset tax on the super rich, forever.
> "you can always cancel the money via asset tax on the super rich"
Does "super rich" mean those who are not in debt but have no assets - like me? --> or the homeless? Isn't wealth fun you get to be homeless!
But this is meant to further enrich the super rich, or so they thought just before the rope tightened.
The excess printed money will almost always find its way around the world and not stay in just the super riches hands. The currency will still be devalued nonetheless and will become worthless to the common man to spend on his survival needs.
No, it's not right, but it's no surprise--we have been headed here for years. I'm thinking this was the Master Plan after interest rates spiked in the early 1980s. How else do you fund an ever expanding government? This is essentially a weath tax withiout having to actually pass a law.
...Food look like the best investment now...
“We could see the two-year Spanish, Portuguese and Italian bonds yields falling below zero in coming months,” said Azad Zangana, a European economist at Schroders , which has about £300 billion ($455 billion) of assets under management.
“It is only a matter of time,” said Nick Gartside, chief investment officer for fixed income at J.P. Morgan Asset management, with $1.7 trillion under management. “We’re still big buyers of debt in those countries.”
Yes ladies and gentlemen, these are the best & brightest minds of money-debt management.
"It makes sense if you don't think about it"
Just sit back and enjoy the show. I have no idea what is going to happen, but it should be entertaining as hell for a little while. When the wheels come off of all this , I will be watching CNBC, waiting to see if anyone's head explodes in disbelief.
You have no idea what is going to happen? Imagine what would be good for you and most people. That aint it. There, the possibilities are now limited and you can start having some idea of what is going to happen - something bad for most people.
Either way, this ship is sinking. I just hope I get to see the captain and his crew drown first.
The fourth Orwellian rule: Loss is Profit.
When I sell you something and finance it for you I get your payments (until they stop coming) and the something back (when the payments stop coming). Win-Win for me. Lose-die-in-the-gutter for you.
Enron bookkeeping.
Fucking aholes with their deflation lies let them pull this BS off. Fuck them
Elvis has left the building........
Probably 30 year debt no less. Like yea, these negative interest rates are sustainable for 30 years (???). More like, I’ve got to do something to make bonus by the end of this year, and who gives a fuck about my client's long term return on ivestment if I don’t.
Should change his position title to "Head of No Income Investments".
Socialism is possible. Money is being abolished.
And when you run out of other people's money to spend, just PRINT...
Some of these countries are so fucked up they can't even afford to pay negative interest.
/s/
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That's A-M-A-Z-I-N-G!!! It sounds almost too good to be true!
Hey, wait a minute...
It is nothing more than a thin veil over full on global Weimar. Paid to borrow? No. That is just the Central bank arranging and enabling full on printing. There is nothing new here. No fantastic new economics have been discovered. They had similar lies in Weimar and Zimbabwe. They never come out and just say they are printing money.
The problem is central banks if run legitemetly have an important role to play as nation builders in the Emerging areas.
The entire goal of a central bank in Emerging countries should be to blow bubbles in sectors of the economy that the country needs.
If the country needs roads built, it should inflate the wages of road pavers by coercing the government into putting out bids to build roads and develop civil engineering standards . . . loan conditional money "I loan you this money to build a road or a bridge with a toll on it".
If the country has a lot of iron ore/gold/silver/oil in the ground the central bank should again coerce the govt to develop those resources and extract them for profit . . .
Once all the sectors of the economy are built up . . . the central bank can play a hands - off role.
Or you could just operate debt free with no central bank . . . just a treasury and whatever happens . . . happens. . . . (probably a better outcome long run).
If you have learned anything in the last 40 years, its hat monetary policy is not a precision instrument, cannot replace fiscal policy, and the money created won't go where central banks think it should.
IIRC, the original version of the Federal Reserve did not allow purchases of Treasury Bonds. The idea was to provide liquidity to ONLY banks in times of stress by rediscounting quality loans. It did not take long for the pols to figure out how to fix that problem as they knew that they would always be "stressed" to find money to give away.
Sure sign of the Apocalypse.
Not that I'm against that.
"Central banks will generally counter the accounting insolvency argument by claiming they plan to hold the bonds until maturity and thus will not actually realize any losses."
Assumes the loaning countries will be able to pay the principal back in full, on schedule. No modern country anticipates ever doing that. They can barely pay interest on existing loans.
No loss in nominal terms, perhaps, but in REAL terms a huge loss due to currency debasement.
However, can a Central Bank that buys bonds with money printed from nothing ever have a REAL loss? Their REAL loss is ZERO, since their REAL COST BASIS is zero.
Q: how will banks pass Stress and meet Tier 1?
A: you pay them to borrow your money
Everybody happy now?
The strategy for the governments that can issue at negative rates is to just sell the bonds and bury the cash in the can in the backyard. Perfect environment for the politicians. Certain gains for doing nothing.
Sell Zero coupon bonds of 2025 at 110. Eazy Peazy. Too bad they eliminated Greece from the ponzi.