Negative yielding sovereign debt is costing investors about $24bn annually, according to calculations by Fitch Ratings, as the universe of sub-zero yield bond has swelled to nearly $10tn.
The rating agency warns that the previously unthinkable scenario of negative-yield bonds is having a “broad impact” on investors like insurers, banks, pension funds and money market funds
Despite gains booked on many of these securities over the last several years, yields for these institutions’ portfolios have fallen sharply, and their ability to maintain profits has been reduced. Banks are already passing on increased costs to certain customers, and insurance companies are assuming incremental risks to compensate for negative yields.
Profits at UBS plunged almost 40 per cent in the first quarter of the year, but the world’s biggest wealth manager attracted far more net new money than analysts expected.
Switzerland’s biggest bank on Tuesday said it had made adjusted pretax profits of SFr1.366bn in the three months to March, against the SFr2.268bn a year earlier and the Sfr1.342bn expected by analysts polled by the company
Heightened economic and geopolitical uncertainty as well as financial market volatility had translated into “abnormally low transaction volumes,” across the banking industry, UBS warned.
UBS’s two wealth management divisions – the mainstay of the group following a 2012 restructuring – missed earnings expectations but posted far higher net new client money than expected.
The Reserve Bank of Australia has opted to cut the cash rate to a record low 1.75 per cent, citing a weaker outlook for inflation than previously forecast.
Last month the RBA left its benchmark rate unchanged at 2 per cent. The RBA previously cut rates twice in 2015.
The Aussie dollar swung to a decline of 1 per cent, at $0.7576 after the decision, from as much as 0.7 per cent higher at $0.7719 beforehand.
There has been plenty of pressure on the RBA to ease further. The RBA’s inflation target is between 2 and 3 per cent, but the most recent available data showed that the trimmed mean of consumer price inflation – the RBA’s preferred measure – rose 1.7 per cent year-on-year in the first quarter, well short of this. It was the slowest rate of CPI since 1999.
The central bank didn’t much around and took the step of citing inflation as a reason for the cut in its first paragraph, a somewhat unusual move. It explained later in the statement:
We hear more and more talk about the possibility of imposing negative interest rates in the US. In a recent article former Fed chairman Ben Bernanke asks what tools the Fed has left to support the economy and inter alia discusses the use of negative rates.
We first have to define what we mean by negative interest rates. For nominal rates it’s simple. When the interest rate charged goes negative we have negative nominal rates. To get the real rate of interest we have to subtract inflation from the nominal rate, so to speak remove the illusion of inflation.
The “real” federal funds rate (effective FF rate minus CPI-U y/y rate of change)
Real interest rates have been negative fairly often, including for most of the period since 2009. The main problem consists of choosing the appropriate measure of inflation.
Since the calculation of price inflation is highly subjective and easy to manipulate, one possibility is to adjust nominal prices to gold to calculate real interest rates. In the chart below you can see nominal U.S. 10-year Treasury rates versus gold-adjusted rates since 1962.
The negative interest rate policy introduced by the Bank of Japan has led to a surge in lending at minimal annual rates of less than 0.25%, a BOJ survey reveals.
Outstanding loans at such rates, which are the lowest categorized by the BOJ, stood at 48.56 trillion yen ($454 billion) in February. The figure represents a 9% gain from January, before the central bank adopted the negative rate policy.
Sub-0.25% loans accounted for 11% of all financing in February, up 1 percentage point from the prior month. Much of the funds were targeted at large corporations.
Meanwhile, the three-month Tokyo Interbank Offered Rate, a benchmark which guides domestic corporate lending rates, has been reaching record lows.
Annual interest rates of less than 1.5% account for three-quarters of all financing. Japanese city banks loaned at an average rate of 0.494% in February, while the mean for regional banks stood at 1.162%. Those averages are expected to drop further with additional corporate refinancing.
The past 30 years are often seen as a bad time for investors. The period saw two epic market breaks in the US, with the bursting of the dotcom bubble in 2000, and the credit bubble seven years later; the collapse of the Japanese stock market in 1990, from which it is yet to recover; and a severe recession following the credit crisis.
So it is disconcerting to be warned by the McKinsey Global Institute that the past 30 years have been a boon for markets that cannot be repeated. US stocks have averaged growth of 7.9 per cent over the period, which is ahead of the 6.5 per cent average for the past 100 years. McKinsey now suggests that growth of only 4.0 per cent over the next 20 years is possible.
European equities have gained 7.9 per cent per year for 30 years, compared to an average for the last century of 4.5 per cent. Bonds, of course, have been in a bull market for the last three decades, which cannot continue much longer.
Several factors made the past three decades so good. The cold war ended, China emerged, and the world enjoyed a demographic sweetspot as postwar baby boomers made and spent money. Converting these factors into drivers of stock market performance, Richard Dobbs of the McKinsey Global Institute lists at least four that cannot be repeated.
Inflation has been tamed In 1985, Paul Volcker was running the US Federal Reserve, and single-digit inflation was still not to be taken for granted. Now that inflation has been tamed, it cannot be tamed again — unless serious inflation returns, which would be disastrous for asset prices in the short term.
Mario Draghi already pointed out that the use of this instrument would be very complex and fraught with legal difficulties. The option has not been on the table, not even informally.
It’s a change in tone from Mr Praet, arguably the ECB’s chief dove, who said last month that helicopter money – where a central bank injects money straight into the veins of an economy or the pockets of consumers – was possible in “principle”, telling La Repubblica:
All central banks can do it. You can issue currency and you distribute it to people. That’s helicopter money… The question is, if and when is it opportune to make recourse to that sort of instrument which is really an extreme sort of instrument.
There are other things you can theoretically do. There are several examples in the literature. So when we say we haven’t reached the limit of the toolbox, I think that’s true.
Mario Draghi is not the most popular man in Germany.
Undeterred, the Italian head of the European Central Bank has again defended himself against accusations that his low interest rate policy is damaging Germany’s notoriously thrifty savers (again), adding: “There is really nobody in the world who is interested in the fact that I am an Italian apart from the German media. And what difference would it make if a non-Italian were now in office? None at all.”
In an interview with German tabloid Bild, Mr Draghi said although interest rates are at record lows, real rates – which take account of inflation – remain higher than they were in the ’90s.
Mr Draghi added some investment advice for Germans instead:
People can influence how much they get on their savings even in times of low interest rates. They don’t just have to keep the money in savings accounts but can invest in other ways.
But there are alternatives when investing savings. In the United States savers had to face seven years of zero interest rates.
Japan back in deflation as consumer prices retreat
You’re gonna need a bigger bazooka, Mr Kuroda: Japan has slipped back into deflation.
Japan’s March inflation data marks the second full month of figures that could display any potential impact from the Bank of Japan’s decision on January 29 to introduce negative interest rates. On present form, that move has done nothing to boost prices, and likely represents some disappointing reading for policymakers ahead of the BoJ’s meeting later today.
The national consumer price index fell 0.1 per cent year-on-year in March, from 0.3 per cent in February and expectations inflation would moderate to zero. This is the first bout of deflation at the headline level since May 2013.
Core inflation, which strips out fresh food prices, is what the BoJ is trying to push toward its 2 per cent price target. It was minus 0.3 per cent last month from zero in February and versus expectations prices would fall 0.2 per cent.
Brazil’s central bank kept interest rates on hold at 14.25 per cent for the sixth straight meeting on Wednesday as the country braces for a deep government shake-up.
In what is expected to be the current board’s last decision before a new central bank president is appointed, the monetary policy committee voted to keep the benchmark Selic rate at its near-decade high
In its accompanying statement, the committee – known as Copom – said:
The Copom decided unanimously to maintain the Selic rate at 14.25% per year, with no bias. The committee recognises advances in the policy to fight inflation, particularly the containment of secondary effects of relative price adjustments. However, it considers that the high level of inflation over 12 months and inflation expectations that are distant from the objectives of the target regime, don’t offer room for more flexible monetary policy.