Madness

[ny_quant]

Two European companies -- French drugmaker Sanofi and German household products maker Henkel -- last week became the first firms to persuade investors to pay them to borrow euros. By selling bonds yielding minus 0.05 of a percentage point, they may well have signaled the bond market's peak

https://www.bloomberg.com/view/articles/2016-09-13/the-bond-market-is-suffering-a-ukrainian-chicken-moment

Насчёт пика не знаю. Как говорится, you’ve seen nothing yet. Во всяком случае, если б меня ещё недавно спросили может ли такое быть, я бы сказал, что такох идиотов не бывает (вернее, бывают, но они уже потеряли свои деньги на чем-то другом) и опять был бы неправ.

Comments

[henryviii.livejournal.com]

Can’t commercial banks lend excess reserves to customers?

No. Reserves can only be held by institutions that have reserve accounts—generally other banks and possibly the government. It’s a closed loop. (Well, almost closed: Electronic reserves can be exchanged for bank notes.) Banks lend and borrow reserves among themselves. They can also buy stuff, like bonds, with their reserves, but such transactions just move reserves around among banks.

Why would a bank need to borrow reserves from another bank?

For starters, the bank might need to meet a minimum threshold for reserves set by the central bank or regulators.

But banks also need reserves to handle electronic transactions across the banking system. A customer’s deposit at a bank is just a loan to the bank. The funds aren’t kept in a vault. So a transfer of electronic money from a customer of Bank A to a customer of Bank B is a transfer of Bank A’s debt to Bank B. And Bank B needs to be compensated by Bank A for taking on the obligation. That compensation comes in reserves: Bank A transfers reserves to Bank B.

Where did the excess reserves come from in the first place?

The central bank created them. In normal times (and it has been a long time since we’ve seen normal times,) banks collectively more or less hold just the reserves they need, and they borrow and lend reserves among themselves. The ECB’s deposit facility, the one now subject to negative rates, had practically nothing in it until late 2008.

In these abnormal times, central banks have created huge volumes of extra reserves amid their emergency action: During the eurozone crisis, banks were too scared to lend to each other, so the ECB allowed needy banks to borrow cheap money in huge volumes directly from the central bank. And when a commercial bank borrows from the central bank, the central bank credits the commercial bank’s account: more reserves are created.

The Federal Reserve, the Bank of Japan, the ECB and the Bank of England have undertaken bond-buying quantitative-easing programs since the financial crisis. Each time the central bank buys a bond, it credits the reserve account of the bank whose customer was the seller. Yet more reserves.

Central banks created the extra reserves for which they are charging banks?

Yes. That’s why negative rates are often seen as a tax on banks.

So what does a negative deposit rate at the central bank accomplish?

It pushes down short-term rates on other types of lending. In theory, that is supposed to provide an economic boost. And, also in theory, it weakens the country’s currency.

How exactly does it make other lending cheaper?

Banks keep their excess reserves in a central bank deposit account. There are a lot of excess reserves, so there are a lot of banks trying to get rid of them by lending them to other banks. That competition pushes the overnight rate down, until it’s close to the deposit rate.

Those overnight rates drag down other rates: the rate one bank will pay another for a one-month loan, for instance, and a three-month loan and a one-year loan and so on. And those rates influence business and consumer rates, such as mortgages.

Negative rates also spur banks and other investors to buy things that are very much like money—short-term debt of ultrasafe governments.

Rates for financing in the capital markets—that is, the interest rate a company gets if it sells bonds to investors—are linked to the yields on government debt. All other things being equal, they go down when government-debt yields go down.

How does it weaken the currency?

Low rates should make euro investors try to move to places where interest rates are higher, such as the U.S. When they do so, they sell euros and buy dollars. (The same principle applies with positive rates.)

This can cause a cycle of rate-cutting.

The Swiss National Bank, for instance, wants to keep the Swiss franc from strengthening against the euro. So when the ECB goes negative, the SNB must go more negative.