What Does The Future Hold For Negative Rates In Europe? Goldman Answers
A week before Mario Draghi disappointed a thoroughly spoiled market by “only” cutting the depo rate by 10 bps, “merely” extending QE by six months, and failing to boost the monthly rate of asset purchases under PSPP, we explained why the ECB is effectively chasing its own tail.
The argument goes something like this: as the market continues to price in further rate cuts, extensions of QE, and increases in the pace of PSPP bond buying, yields on core paper will be driven inexorably lower, quickly negating any benefit the ECB would have gotten vis-a-vis the expansion of the purchase-eligible universe of bonds.The only alternative is to do away with the depo rate floor altogether and thus lock in even greater losses for the central bank on its trillion euro, “held to maturity”, pile of EGBs. Absent that, the ECB is effectively forced to delay the expansion of PSPP. In short: Draghi, like Kuroda, is running out of bonds to buy and the ECB’s situation is complicated by the depo rate constraint. Each incremental purchase takes Draghi closer to the QE endgame at which point the bank will either be forced to buy riskier assets (like IG corporates or, gasp, stocks) or else concede defeat on the inflation target.
While the market might have been disappointed by the ECB’s “underdelivery”, it came as a relief for the Riksbank, the SNB, the Norges Bank, and the Nationalbank who are effectively forced to cut each time the ECB eases or risk seeing upward pressure on their respective currencies. That dynamic has led to a veritable race to the Keynesian bottom with Norway as the last man standing in terms of conducting monetary policy with rates above zero.
As we head into 2016, a number of questions remain. Is Draghi done or will sluggish inflation “force” the former Goldmanite - gun to his head - to expand PSPP and/or take the depo rate to -0.40% (or lower)? If the ECB does cut further but doesn’t adopt a two-tiered approach to the application of NIRP, will the SNB be forced to go “nuclear” and apply negative rates to depositors in order to mitigate excess pressure on the EURCHF cross (remember, because the SNB has different rules for the application of NIRP, ECB cuts tend to impact the franc more than other currencies)? Will low inflation force Sweden to cut further despite a frightening housing bubble? Can the Norges Bank afford to keep rates in positive territory given the continued plunge in crude prices? And on and on.
For those who enjoy pondering such things, we present the following excerpts and graphics from Goldman’s Allison Nathan who looks at where we stand now, and where we’re going in the year ahead.
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From Goldman
Where we stand
Official interest rates have fallen further in the Euro area and Sweden. The European Central Bank (ECB) lowered its deposit facility rate 10bp to -0.30% on December 3, pushing beyond levels previously described by Mario Draghi as the bank’s lower bound. The latest ECB measures fell short of market expectations, likely reducing the pressure for neighboring central banks to add stimulus; the Swiss National Bank (SNB) and Riksbank have subsequently been on hold.
Sweden’s Riksbank has been the only other central bank to push rates further into negative territory since we published in February, with cuts of 15bp in March and 10bp in July motivated by appreciation pressures on the krona. All the while, inflation—the Riksbank’s original reason for introducing negative rates—has been rising.
Government bond yields remain in negative territory. As of December 14, over 50% of European government bonds maturing in less than five years had a negative yield, roughly the same as in the run-up to the launch of ECB QE in March. Two-year government bond yields were generally lower on the year, despite some rebound after aggressively pricing further ECB easing ahead of the December meeting. (The German two-year yield, for example, bottomed out at -0.44% on December 2.) Looking beyond Europe, roughly half of two-year government bonds in the developed world trades at a negative yield.
Sovereigns have issued debt at record-low—or altogether negative—yields. In April, Switzerland became the first country to issue 10-year government bonds at a negative yield; other governments did the same at shorter maturities.
By contrast, companies with large pension deficits have struggled and continued to underperform, as the present value of their future liabilities continues to rise. Alongside mixed asset returns, pension funding ratios have continued to deteriorate. Similarly, insurance companies have struggled with falling reinvestment yields and solvency ratios.
Where we’re going
Risks that could push the ECB’s lower bound. While our base case is for the ECB to stay on hold, low inflation or a stronger euro could open the door for further monetary easing. We see the ECB’s effective lower bound in the ballpark of -0.50%. Should the ECB cut rates further, it would likely pressure neighboring economies in Europe to do the same or to implement other easing measures, particularly in cases where the local currency is pegged to the euro.
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negative rates just show a total lack of real assets and with a real estate market that just keeps going up in Europe the pain will be terrrible once the generational loans won't even do to be able to buy a house.
@ GoldCon
I'll just withdraw into Au.
Deal with it.
Guy from Sweden checking in here. Not a specialist in negative interests rates and bonds in generel, but my question: how will the swedish crona (SEK) likely to develop against other currencies? Will it strenghten or weaken due to Riksbankens negative interests rates?
Who knows? It's almost impossible to say. We're in completely uncharted waters. Nothing responds as it should any more in these "markets."
Once the Kabuki theatre of the Euro falls apart all currencies outside the Euro should do well also the Crona, a .45% yield differential is meaningless.
But these markets are manipulated, unlogical and one should not play.
strengthen. You can take that to the bank....
unless the Riksbankens pulls a Swissie. then go to an American bank
solved that for ya?
housing prices going up? i just bought a 20.000Eur house, in the countryside of Spain, from 1930's thought. ;)
How can any rational person buy a bond that is guaranteed to lose money? WTF? Europe has many problems, this may not be at the top of the list...
How can any rational person buy a bond that is guaranteed to lose money?
The might if they think the bonds are safer than any of the alternatives.
I don't see much inflation in our immediate future, unless the, " Central Bank Kraken" is released.
We're looking at the perfect storm of macro financial mis-management.
>>> Why have high food costs persisted, even though primary input costs have declined? [energy]
I think we need some MOAR centrally planned taxes. [global warming] [healthcare] [regulation] to keep the ponzi alive, for those (retired) mid 50's lifeguards in Kali.
Have a little respect. Those guys gave the best years of their lives to Water Safety.
… and got first crack at some
pretty hot babes.
"Barborous relics" are much safer, but that's like a rotary phone or having a real face-to-face conversation.
Tangible, real, and of value.
Hang the Banksters!
Or because they have no alternative.
Chimpfucker, there are alternatives. Farmland, for example.
Simple - they expect rates to drop even further so they can sell the bond (to a greater fool) at a profit.
You answered your own question... "How can any rational person... "
We live in irrational times.
Pension funds, banks, other entities that are obligated to hold bonds, not a person tho.
I'm sure the big money is already leaving or has left. So that leaves the masses who believe government is the answer to all their problems. There in lies the problem. Coming soon to the USA!
Beam me up, let's set a course to find intellegence on some distant planet. This place has lost it.
ZIRP and NIRP are plunder and everybody knows it, especially Goldman Sachs. The key to this whole tragicomedy is Goldman Sachs.
People exchange their work for money; savings is stored labor. To deplete that labor with below-inflation interest rates, i.e., off the market rates, is to redistribute that wealth to those who did not earn it.
Large portions of the economies of the EU and the US are now dependent on a transfer of wealth from savers to welfare, to the unemployed and to the insolvent TBTFs in order to stimulate buying. So how does that work out? The chains, the supermarkets, the stock market, the oligarchs and the governments and their employees all now depend on the transfer of someone else's labor.
"Once a nation parts with the control of its currency and credit, it matters not who makes the nation's laws. ... Until the control of the issue of currency and credit is restored to government and recognized as its most sacred responsibility, all talk of the sovereignty of parliament and of democracy is idle and futile."
--Mackenzie King, Canadian Prime Minister 1935-1948.
If you want to end Goldman Sachs end the Fed.
Hey J.R. it almost makes you wonder if the Fed. reallocated that $Trillon Tyler was discussing ,last week, into the [global]swaps markets?
It would go a long way to explaining how the rates dropped from 34 to 14 basis points on December 31st 2015.
Belgium is old hat, and now the fed is using excess reserves on a global liquidity " marry-go-round" as they run out of FRACTIONAL reserve buyers.
Yes, the ligitimate markets are long $USD. The starving Africans being saved by General Electric.
Others have used the term here, but we are living in a financial world driven by niggernomics. Rewards corruption and the undeserving, penalizes the hardworkers and savers.
actually i think vice versa...and take the rest of the GS CB alum down too just to be sure
Negative rates...what a fucking Ponzi.
Burn it all down!
I'll tell you where Goldman stands: right behind us. No dinner, no dancing, no kiss, no reach-around. Just bend over, here it comes again.
All of this is too much to handle...going back into my caveman den and wait for the Alabama-Clemson football game...
I live about an hour and a half from Clemson (the closest major college) and lived here the last time they won a National Championship. I had to listen to, 'We're # 1" for the next year. Clemson has had a good enough year for me, Roll Tide.
"It was Almost worth suffering the Great Depression to find out how little our Supposed Great Men knew"l Will Rodgers.
Negative rates on Euro-denominated bonds means an inverted yield curve between U.S. Treasury Bill rates and long-dated Euro-denominated bonds. Thus you have the motivation for a rate hike.
What is being missed entirely is how much money is being spent defending the zero-bound.
That does not matter. Europe is lost. The muslims control it now. Europeans like the rest of the west has lost its' balls
Oh, hello Trump, we missed you. You tell it like it is...