A new milestone for the warped universe of negative yields amid today’s global market convulsions. The volume of government bonds trading below 0 per cent has now reached $6tn, not far off one-third of the entire market
Leading the pack is Japan, where the benchmark 10-year yield has done the unthinkable and turned negative following the Bank of Japan’s decision to introduce its own negative lending rate.
Negative market rates are the weird outcome of a world of low inflation and central bank bond buying policies. Because they ensure a guaranteed loss if the paper is held to maturity, investors will buy them only if they think their money is at risk elsewhere or they expect poor economic growth will lead central banks to keep on cutting rates.
As the Budget season draws up on us, what is the real state of the economy? The official GDP numbers should give cause for satisfaction, since they point to a second year of growth exceeding seven per cent, despite successive droughts. But there is no shortage of people who feel and sometimes argue that the underlying reality is not what the numbers say. The “feel good” factor could be missing because asset prices are low — share prices are back to where they were a couple of years ago, and real estate prices are if anything lower. Also missing is the money illusion that comes with inflation: real income – for companies and individuals – may be growing at seven per cent, but with inflation of a similar rate, the nominal income growth becomes 14 per cent. At that rate, companies could virtually double their turnover in five years. However, with wholesale price inflation being negative, the money illusion is missing and nominal incomes more or less reflect real growth. Perception now matches reality in a disconcerting way. If anything, the commodity price deflation results in eye-grabbing headlines about steel, aluminium other commodity product companies losing money or wiping out profits.
One way to tackle the perception issue would be to develop a desi version of what came to be called the Li Keqiang index in China — after that country’s prime minister-to-be said that he tracked credit growth, freight movement and electricity consumption to figure out the real state of the economy. If you look at those parameters, credit growth has been slow, having dipped to single-digit growth, but more recently has picked up to about 11 per cent — which is comfortably more than the rate of nominal GDP growth. However, the bulk of the increased credit is in consumer lending — which reflects consumer confidence. Corporate loans are said to be growing at barely five per cent — which is not a good sign. As for electricity consumption, growth in 2014-15 was a healthy 8.4 per cent, but has dipped to 4.4 per cent in the first eight months of 2015-16 (the medium-term average rate of growth here is about 5.5 per cent). And freight movement has certainly been slow — both on rail and by road.
Brazil’s annual inflation rate has hit its highest level since November 2003, adding to the unpalatable cocktail of problems facing the Latin American country as it battles through its worst recession in more than a century.
The annual inflation rate edged up to 10.71 per cent in January from the already painfully high rate of 10.67 per cent a month earlier. Economists had been hoping for a small decline, to 10.52 per cent.
Monthly prices rose by a worse than expected 1.27 per cent in January.
Brazil’s central bank surprised the markets last month by keeping interest rates on hold, citing an “increase in domestic and, principally, external risks”.
One week after the surprise from Tokyo and the introduction of sub-zero interest rates, Japanese 10-year government bond yields are on the brink of turning negative. Negative yields at shorter maturities have become part of the furniture, but at this maturity, it’s quite something. (Low yields reflect high prices. Negative yields reflect the fact that investors are willing to take a nominal loss in return for safe storage of their cash.)
At pixel time, they yield 0.01 per cent, down by 0.03 percentage points.
Thing is…. unlike previous efforts by the European Central Bank, the BoJ is not really hoping to push down bond yields. It wants a weaker yen. It’s not getting one; the dollar is down at Y116.84 at the moment, having comfortably wiped out the Japanese currency’s immediate losses that followed the BoJ’s sub-zero adventures.
Kit Juckes, a macro strategist at SocGen asks “where’s the party to honour negative 10-year JGB yields?”
I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody,” said James Carville, an adviser in the Bill Clinton administration in 1993, when bond yields in the US spiked in response to fears of increased spending.
The quote, now a favourite of bond vigilantes, took on an Indian connotation last week when the Reserve Bank of India’s (RBI) governor Raghuram Rajan used it in a speech in New Delhi. Rajan was sending a message, perhaps on behalf of the bond markets, to the government. The message: we won’t take kindly to stretching the fiscal deficit targets for a second year and we are not comfortable with the surge in supply of state government bonds.
The message from the bond markets, if not intimidating, is certainly worrying. And the message is going out both to the Narendra Modi-led central government and the Rajan-led central bank.
As always, the bond market is talking through yields:
•The yield on the 10-year benchmark bond is now at about 7.84%, similar to the level in January 2015, when the RBI started cutting rates.
•The 3-month commercial paper yield, a benchmark for short-term corporate borrowing, is at 9%, which is higher than a year ago.
•The yield on state development loans in the most recent auction in January was between 8.36% and 8.42%. A year ago, it was in the range of 8.05-8.10%.
There are multiple messages in these bond yields. Let’s start with what the markets are trying to say to the government.
The Bank of Japan has remained bullish about its decision last Friday to adopt a negative interest rate policy for the first time. BOJ Gov. Haruhiko Kuroda called it “the most powerful monetary policy framework in history” in a speech on Wednesday.
On hearing the news, Japanese foreign exchange and equity markets certainly looked like they were ready to say sayonara to the risk-averse mood that has prevailed in global markets since the beginning of the year.
The reality however, tells a different story. After surging by more than 800 points in two days through Monday, the Nikkei Stock Average has since slid back down to last Thursday’s closing level. Similarly, the yen dropped to the upper-121 range, but took little time to return to the same level as before the announcement. Coming out in defense of the policy, a BOJ official claimed that the central bank is not overly concerned about how far either would move from the levels seen before the latest policy meeting.
The overall impression is that the “most powerful” weapon did little or nothing to quell market turmoil.
The BOJ cited “volatility in global financial markets” as the reason for the policy update, due mainly to “uncertainty over factors such as future developments in emerging and commodity-exporting economies.” The bank was attempting to prevent a combination of weaker stocks and a stronger yen from worsening business confidence in Japan Inc.
Indian households expect inflation at over 10 per cent in the year ahead, twice as much as RBI’s retail inflation target of 5 per cent by March 2017, according to a survey conducted by the Reserve Bank of India.
According to Reserve Bank’s ‘Inflation Expectations Survey of Households: December 2015′ results, which were out today, Indian households expect inflation at 10.5 per cent in the next one year and 10.3 per cent each for current and next three months.
These survey results act as useful information for RBI to decide on its monetary policy.
At its policy review yesterday, RBI kept repo rate unchanged at 6.75 per cent, awaiting inputs from the Budget on February 29 and further data on inflation.
In general, a majority of the respondents — 90 per cent — expect prices to increase over the next three months and a year ahead.
He goes one-by-one through all the major economies and argues for trouble ahead.
“Our finance-based global economy is transitioning due to the impotence of monetary policy which has always, and is now increasingly focused on the elixir of low/negative interest rates,” he writes.
He mocks central banks and their ridiculous fixation on models and math.
“The Fed, global central banks, and their fixation on statistical modeling to influence monetary policy, as opposed to common sense and financial regulation,” Gross writes. ” They all seem to believe that there is an interest rate SO LOW that resultant financial market wealth will ultimately spill over into the real economy. I have long argued against that logic and won’t reiterate the negative aspects of low yields and financial repression in this Outlook. What I will commonsensically ask is ‘How successful have they been so far?'”
Japan’s 10-year government bond yields are backing away from zero per cent, a sign that the initial buying frenzy in the debt following the Bank of Japan’s surprising decision to impose negative interest rates is fading.
Yields plunged on Friday and Monday to record lows as a result of the Bank of Japan’s decision to impose negative interest rates.
Overnight, a new 10-year Japanese government bond auction received slightly more tepid demand than had been anticipated; the lowest price bid came in at Y102.03, below the Y102.16 expected.
Right now, yields on 10-year bonds are up by 0.029 percentage points to 0.073 per cent.