Monday, January 19, 2015

Negative Interest Rates

Unless you live under a rock, you will have noticed that last Thursday the Swiss central bank decided to remove the Euro peg.  The shock was massive in the F/X complex, especially the retail side that got "wacked" for using massive amount of leverage -- the end result several F/X brokers have gone bust (and at least one hedge fund).  The fact that the Swiss said, until the very last minute, that they would support the peg is normal;  the Bank of England did the same until two hours before it exited the Euro (Ok this goes back a few years -- decade maybe).  Bottom line the Swiss gave up when the could no longer afford the strain.

Little noticed by the punters at large is that the Swiss also reduced interest rates on deposits to -0.75% (yes Dorothy, NEGATIVE).  The is first mover advantage didn't last long already by the end of Monday (Europe time -- America is closed today) several other central banks had made the same change.  This is the rate the central bank charges the banks to keep deposits -- banks that deposit excess cash with central banks will now pay for that pleasure...

Needless to say that the only reason to go negative is fear of deflation.  To try to force money into the economy.   It also means that borrowing rates are about to drop too.  If the 10 year T-bond rate is around 1.81% this morning, my guess is that by tomorrow that will have dropped by about 0.5% -- the reason is that its the ultimate means of pushing borrowings.    More quantitative easing is ahead -- the Japanese on the other hand have announced that they're done! but interest rates there are already near zero -- 10 year JGB trading at 0.20% down 0.05% today.   All this with little to show in terms of growth (well wages are down 7% YoY, so that's an accomplishment of sorts)

BTW the drop of the US 10y T-bond is not my brilliant forecast, its common view on the street that bond yields are going one way, and that's down -- the magic number is apparently 1%.  I find that incredible when you think that inflation is around 2.5% to 3.0% right now.  Lending to the US government generates a negative wealth creation drag of 1.5% to 2% per annum.  It shows how bad things are going.

In fact, Q3 & Q4 2014 were great quarter for the US economy (not so much for the working stiff -- but the rich folks did ok).  I hear that soon this year the 1% will account for over half the global wealth.  Sometime one wonders what all those rich folks are bitching about, if you consider how well they are doing.

Anyway, the train is going forward, and rates are going down.  It worked so well for japan, the rest of the OECD has decided to join-in!


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