When he was visiting Washington in April for the semi-annual meeting of the International Monetary Fund German finance minister Wolfgang Schäuble dismissed the appeal of taking advantage of the country’s record low borrowing costs. He better be careful as that window might be closing.
After touching a record low of just under 0.08 per cent in April, the yield on the ten-year German bond finished up at almost 0.9 per cent on Wednesday.
Combined with Tuesday, the sell-off is the largest two-day move higher in ten-year German bond yields since 1998, according to Citi.
The yield, which moves in the opposite direction to the price of a bond, rose 17 basis points to 0.88 per cent.
Just with words, Mario Draghi, European Central Bank president, dazzled bond markets.
What will happen when he actually acts?
His announcement on January 22 of eurozone “quantitative easing” led to another big lurch down in government borrowing costs. Yields, which move inversely with prices, are now negative on German bonds with maturities of up to six years. Yields on 10-year Spanish and Italian bonds have fallen even faster than German equivalents.
This week’s ECB meeting in Cyprus will set the stage for QE implementation this month. So far Mr Draghi has been coy about details, even about exactly when asset purchases will start — with good reason: how the ECB manages its bond buying will largely determine where yields head next. In turn, that could prove crucial in determining whether his ambitious programme is perceived as succeeding and likely to pull the eurozone back from the brink of dangerous deflation.
q Since May 2013 US bank credit has contracted at a 3% annualised rate. q In Euroland, bank lending to the private sector is contracting at 3% this year. q Lower exchange rates and higher interest rates spell lower growth in emerging markets.
QE has not made baby boomers borrow more and save less q The ageing baby-boom generation (48-67) is saving more, borrowing less and reducing debt as they head into retirement.
q Under-48s have too much student debt; and with balance sheets damaged by falling property prices, they cannot gear up to offset the baby boomers’ delevering. q Real personal disposable-income growth is at levels associated with recessions, bond yields are rising and inflation falling.
The Federal Reserve’s decision Wednesday to continue its $85 billion monthly bond buying program at full speed shook up investors’ expectations for how long the central bank would keep up its easy money policies, but a survey of Wall Street analysts raises some questions of how much has really changed.
The Wall Street Journal conducted a quick survey, asking Fed watchers on Wall Street how big they expected the Fed’s balance sheet to become now, after Wednesday’s decision to keep buying, compared to June, when the Fed signaled it planned to slowly wind the program down by mid-2014.
The Fed had total assets of $3.722 trillion as of September 18, according to its weekly release of details about its balance sheet. As of June, when Fed Chairman Ben Bernanke said the Fed expected to wind down its program by mid-2014, analysts on average expected the Fed to finish the program with assets totaling $4.06 trillion. That’s based on eight responses received from Fed watchers at big banks and research firms likeGoldman Sachs, J.P. Morgan and Macroeconomic Advisers. After Wednesday decision to keep the bond buying program going, and play down the earlier guidance of an end by mid-2014, analysts expect the balance sheet to grow to $4.27 trillion.
Analysts, in effect, expect the Fed to buy $218 billion more in Treasury and mortgage debt than they had expected before, which is another way of saying they expect the program to go about two and a half months longer than before. This is a lot of money to most people, but a fraction of the Fed’s already large holdings. And it’s not clear that it will get the Fed all that much, in terms of economic stimulus. One rule of thumb is that every $100 billion that the Fed adds to its balance sheet reduces long-term bond yields by 0.03 percentage point. Using this analysis, an extra 2.5 months of buying reduces bond yields by 0.654 percentage points. That’s meaningful but not monumental.
Larry Summers’ abrupt exit from the race to chair the US central bank has sparked a relief rally in Asian markets but domestic economic challenges and the upcoming tapering of Federal Reserve stimulus raise questions over the sustainability of the gains, according to analysts.
Bullish spirits were raised across equities and currencies on Monday as investors bet that ultra-loose monetary policy would now live longer. Mr Summers was seen as the candidate more likely to call a quick end to the Fed’s quantitative easing, expected to trigger a reversal in the floods of hot money that have flowed into emerging markets in search of better returns.
“It’s a sigh of relief here,” said Frederic Neumann, co-head of Asian economic research at HSBC. “But in two days this will blow over because Asia has bigger problems. The Fed will taper in accordance with economic data and Asia has to do its homework to prepare for a rising rate environment.”
Warren Buffett is not called the ‘Oracle of Omaha’ for nothing.
‘Be fearful when others are greedy, and be greedy when others are fearful’ is good investment advice looking back at the turmoil of September 2008.
The demise of Lehman Brothers five years ago marked the start of a truly fearful six months for investors. Only in March 2009 had risky asset prices fallen far enough for bargain-hunting buyers to begin picking up equities and lower-quality bonds.
On the anniversary this weekend of Lehman’s collapse, those investors who stayed the course in equities and junk bonds can afford a smile. The S&P 500 index has gained 50 per cent.
They have done well, though alternative bets made in 2008, such as buying a New York City taxicab medallion, have done even better.
RBI has made SOE banks’ book value more opaque by allowing banks to transfer bonds to HTM at historical prices – Given the sharp increase in interest rates since 15th July 2013, banks (especially SOE banks) were sitting on big MTM losses on their government bond books. RBI has now allowed banks to do the following:
1. It has allowed banks to keep SLR bonds in HTM at 24.5% of net liabilities (NDTL) until further notice (against earlier requirement of 23% over time).
2. Banks will be allowed to shift SLR bonds to HTM (up to 24.5% of NDTL) from AFS as a one time measure. Moreover, banks can shift these bonds at prices as of 15th July – the date of first RBI action.
3. Moreover, if banks have any losses on remaining AFS bonds, they can spread it over next 3 quarters. RBI was likely concerned by the hit on capital SOE banks would have had to take – SOE banks were likely sitting on meaningful bond losses (~Rs.175bn for our coverage SoE banks – ~40bps of risk weighted assets). This would have taken out a lot of equity from the already capital starved SOE banks sector. This move by the RBI is an attempt to reduce the capital hit.
India, 1991. Thailand and east Asia, 1997. Russia, 1998. Lehman Brothers, 2008. The eurozone from 2009. And now, perhaps, India and the emerging markets all over again.
Each financial crisis manifests itself in new places and different forms. Back in 2010, José Sócrates, who was struggling as Portugal’s prime minister to avert a humiliating international bailout, ruefully explained how he had just learned to use his mobile telephone for instant updates on European sovereign bond yields. It did him no good. Six months later he was gone and Portugal was asking for help from the International Monetary Fund.
This year it is the turn of Indian ministers and central bankers to stare glumly at the screens of their BlackBerrys and iPhones, although their preoccupation is the rate of the rupee against the dollar.
India’s currency plumbed successive record lows this week as investors decided en masse to withdraw money from emerging markets, especially those such as India with high current account deficits that are dependent on those same investors for funds. Black humour pervaded Twitter in India as the rupee passed the milestone of Rs65 to the dollar: “The rupee at 65 – time to retire”.
The trigger for market mayhem in Mumbai, Bangkok and Jakarta was the realisation that the Federal Reserve might – really, truly – soon begin to “taper” its generous, post-Lehman quantitative easing programme of bond-buying. That implies a stronger US economy, rising US interest rates and a preference among investors for US assets over high-risk emerging markets in Asia or Latin America.
India’s financial woes are rapidly approaching the critical stage. The rupee has depreciated by 44% in the past two years and hit a record low against the US dollar on Monday. The stock market is plunging, bond yields are nudging 10% and capital is flooding out of the country.
In a sense, this is a classic case of deja vu, a revisiting of the Asian crisis of 1997-98 that acted as an unheeded warning sign of what was in store for the global economy a decade later. An emerging economy exhibiting strong growth attracts the attention of foreign investors. Inward investment comes in together with hot money flows that circumvent capital controls. Capital inflows push up the exchange rate, making imports cheaper and exports dearer. The trade deficit balloons, growth slows, deep-seated structural flaws become more prominent and the hot money leaves.
The trigger for the run on the rupee has been the news from Washington that the Federal Reserve is considering scaling back – “tapering” – its bond-buying stimulus programme from next month. This has consequences for all emerging market economies: firstly, there is the fear that a reduced stimulus will mean weaker growth in the US, with a knock-on impact on exports from the developing world. Secondly, high-yielding currencies such as the rupee have benefited from a search for yield on the part of global investors. If policy is going to be tightened in the US, then the dollar becomes more attractive and the rupee less so.