BofA Looks At Europe's Record €2.6 Trillion In Negative-Yielding Debt, Is Shocked At What It Finds

Tyler Durden's picture

Yesterday we reported something that has never happened before in Europe: more than half of European sovereign issuers just saw the yield on their 2 Year Notes trade not only below zero, but hit never before seen negative yields.

 

As we further noted, this brought back memories of a post we did back in January when JPM was shocked to find that "in the aftermath of the ECB's NIRP policy, and subsequently QE, an unprecedented €1.4 trillion in European debt with a maturity of more than 1 year traded down to subzero, as in negative, yields."

Overnight BofA's Barnaby Martin decided to break down the most recent total and found something staggering: that €1.4 trillion number is a long gone memory and has been replaced with a "negative-yielding wonderland." To wit:

The easing bias of central banks in Europe over the last week has exacerbated the shortage of positive-yielding assets. Negative-yielding government debt in the Eurozone has jumped from €2tr to €2.6tr over the last week and now stands at a record high. The previous peak in negative-yielding government debt was €2.4tr, reached in April this year prior to the “Bundshock”. 

Visually Europe's monetary twilight zone looks as follows:

This was the be expected, as now every single activist central-bank is exporting deflation with a passion. The result is that negative yields have led to even more... deflation.

The problem of low inflation remains evident. Swiss inflation has collapsed into very negative territory, albeit precipitated by the SNB abandoning their currency peg earlier in the year. While Danish inflation has moved away from zero post big rate cuts in 2015, it is still hovering at just 0.5%. And Swedish inflation has been stuck around zero since early 2013.

So while everyone is gradually realizing that unconventional monetary policy using the bank reserve pathway simply does not work to increase broad inflation (however it does miracles for asset-price, i.e., stock market, inflation) which in a world drowning under $200 trillion in debt is the only goal, and will ultimately be replaced with the hyperinflationary endgame of simple monetary paradrops, also known as central-bank funded fiscal stimulus or "helicopter money", for now the hope is that doing more of the same which is clearly not working will finally work, and lead to the much desired jump in inflation.

Alas, it won't, because as we have stated for years, and where Bank of America finally "gets it", frontrunning central banks purchases of government bonds, which pushes yields to zero and in Europe's case, well below, is in itself the most deflationary signal possible.

Recall that the thinking behind NIRP was simple: to force people out of their savings and to invest their rapidly devaluing cash in either the stock market or the real economy. However, since as shown above, everyone is merely frontrunning the ECB's future purchases, yields continue sliding signalling a tsunami of deflation...

... which in turn makes the money in the bank even more valuable.

And this is where BofA admits something that, at least to its own conventional sensibilities, is quite amazing: NIRP is achieving the opposite of what it was meant to achieve.

The problem of low inflation remains evident. Swiss inflation has collapsed into very negative territory, albeit precipitated by the SNB abandoning their currency peg earlier in the year. While Danish inflation has moved away from zero post big rate cuts in 2015, it is still hovering at just 0.5%. And Swedish inflation has been stuck around zero since early 2013.

And the stunner:

Yet, household savings rates have also risen. For Switzerland and Sweden this appears to have happened at the tail end of 2013 (before the oil price decline). As the BIS have highlighted, ultra-low rates may perversely be driving a greater propensity for consumers to save as retirement income becomes more uncertain.

The evidence:

By the way, "perversely" is the term economists use when reality not only does not comply with their models but does precisely the opposite of what was intended.

BofA concludes:

For now, negative rates as a policy tool remain a “work in progress”, judging by the current inflation levels across Europe. But the rise in household savings rates amid so much central bank support is paradoxical to us, and mimics what we highlighted in the credit market earlier this year. Companies in Europe are deleveraging, not releveraging, and are buying back bonds not stock.

 

Despite NIRP, therefore, “animal spirits” across companies and consumers in Europe have yet to be stirred.

And that is how, in a very polite way, you admit Europe's monetary policy has failed.

But fear not: when even "moar" QE and NIRP do not work, and the economists of the ECB admit the "monetary twilight zone" was a disaster, there is one last "tool" they can and will use - helicopters.

Because when it comes to printing money, whether in digital reserve format, or physical paper format, there is literally no limit how much can and will be created to achieve what is the endgame of the current monetary dead end: the total destruction of fiat as a store of wealth in order to preserve the global equity tranche while wiping away a few hundred trillion in debt.