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  #151  
Old 09-19-2019, 03:26 PM
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Mary Pat Campbell
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https://knowledge.wharton.upenn.edu/...ign=2019-09-17

Quote:
Are Negative Interest Rates on the Way in the U.S.?

Spoiler:
First it was former Federal Reserve Chairman Alan Greenspan saying back in August that he sees “no barrier” for U.S. Treasury yields going negative. Then President Trump called on the Fed this month to drive interest rates negative in order to stimulate the economy. While negative rates have been a distinguishing feature of the Japanese economy and many European economies for some years now, the concept has not been a serious possibility in the U.S. until recently.

The concept basically involves a charge to banks for holding reserves. That cost would be intended to spur them to lend more, which — along with lower rates more generally — would presumably drive economic growth. Negative rates on government securities held by the public are another possible scenario. Greenspan told CNBC on September 4 that investors should watch the yield on the 30-year note to see if negative interest rates are in the offing.

Today, there are some $16 trillion in negative government securities worldwide, and the European Central Bank (ECB) on September 12 cut its interest rate 10 basis points to a record low of -0.5% and also ordered a new round of quantitative easing ($20 billion in bond purchases and other financial assets) in November. Such bond buying drives down yields and cuts borrowing costs. The ECB also recommended some spending stimulus for countries — to boost European Union economies.

But while lower interest rates generally can whittle down government debt, they also subtract from the returns earned by banks and individual savers. And when rates turn negative, it is not clear exactly what the bottom-line effects might be long term across the economy. Some observers say negative rates could lead to a slow-growth environment from which it would be difficult to escape. Others contend the overall effect would be to stimulate the economy.

Behind the Trend

But what is driving this trend, and what might it mean for the U.S. economy?

In addition to long-term trends, the immediate cause for the U.S. is likely trade tensions, which have touched off an investor flight to the perceived safety of U.S. government securities. That has pushed interest rates lower. And that all piles on to a longer-term drift downward for rates, long underway and led by a slowing economy. Japan, for example, has had negative rates since 2016.

The slowing of economic growth is sometimes blamed on “secular stagnation,” said Wharton professor of legal studies and business ethics Peter Conti-Brown during a recent segment of the Knowledge@Wharton radio show on SiriusXM. (Listen to the podcast at the top of this page.)

Secular stagnation has been defined as “a prolonged period in which satisfactory growth can only be achieved by unsustainable financial conditions.” U.S. economic growth, while steady, has been lackluster at a time when the current expansion since the Great Recession is the longest on record. For reasons not well understood, Conti-Brown added, inflation is low despite very low unemployment.

Part of reason for the low-growth economy is demographics — an aging workforce — said Lisa Cook, a professor of economics and international relations at Michigan State University, who also joined the radio show. In agreeing with Greenspan on that point she added, “We have a population that is not only aging but leaving the workforce,” and that is a drag on the economy.

Given the exodus from the workforce, retirees will depend more on their savings, and thus negative interest rates “will have tremendous implications for them,” Cook added. Similar — even stronger — trends are at play in Europe and Japan.

Downward Pressure from Inflation

Typically, when interest rates remain low for a long period, inflation picks up, but this time that is “really not happening,” noted Wharton finance professor Itay Goldstein, on the radio show. It’s time to challenge the “old paradigms” because something structural seems to have changed. At the same time, cheaper money has flowed freely into boosting asset prices, from equities to bonds and real estate, he added. “So maybe this is where we see the effect. But we don’t see it in prices of goods. We don’t see it in inflation.”

“We simply don’t know how markets in the world’s largest economy would respond to this new world.”–Peter Conti-Brown

In any case, the Fed is left today with less power to influence financial markets given that rates are already so low. When rates hit zero, the so-called zero-bound, the Fed’s potential influence is thought to be at the end. Negative rates could change that. Since the Great Recession, lowering rates has not been as effective at stimulating the economy as in the past, and QE has also lost some of its bite. “So, central banks are asking themselves, ‘what can we do?’” Goldstein added. One tool is to cut rates to below zero.

Conti-Brown agreed. He pointed out that Fed chair Jerome Powell admitted that the Fed’s key estimate of “one of the most important indicators — the unemployment rate, that is the so-called ‘natural rate,’ the rate that it should be targeting — has been wrong. And not just wrong, badly wrong.” While unemployment rates kept slipping down, inflation did not budge, unlike what the models predicted. The relationship between inflation and unemployment “seems to be absent without leave.”

Some observers argue that there is an explanation for inflation’s disappearing act, and that is an overall lack of demand that keeps the economy below its full potential productive capacity. Fiscal stimulus is called for, they contend. The problem with that is ideological and political. With budgets deep in the red, and a prevailing mood against adding to debt, more spending would appear to be a non-starter for now.

Conti-Brown explained that one way to think about negative rates is to ask if they would have made any difference during the Great Recession. Had the Fed at the time cut nominal interest rates into “deep negative territory,” he added, “is it conceivable that the recovery would have been much, much faster? Yes, it is. This could be a very potent tool.”

Nevertheless, Conti-Brown added that there remains the question of whether or not the Fed has the legal right to move rates below zero and whether or not institutionally the Fed is capable at the moment of taking what could be viewed by some as such a drastic step. What’s more, political resistance would be strong and the panelists agreed that politics is increasingly important in influencing the Fed’s interest rate policies.

Ample Uncertainty

On top of that, there is a lot of uncertainty about the effect of negative rates. “How will individuals and firms react?” asked Cook. “Will they continue to wait for further rate cuts, will they continue to wait for lower mortgage rates or lower interest rates on their loans…? We don’t know. This is completely new territory.”

Regarding consumers, Cook noted that if banks can’t “make money the traditional way, they’re going to try to make money by [charging] more fees. … This will certainly raise some safety and regulatory issues related to consumers.”

Conti-Brown agreed that it is very difficult to predict all of the results that negative rates would produce. “We simply don’t know how markets in the world’s largest economy would respond to this new world.” Would it lead to “explosive economic growth” or “high inflation that we never expected or … something new that might just be coming our way that we didn’t anticipate?”

“Central banks are asking themselves, ‘what can we do?’”— Itay Goldstein

Another consideration: the effect negative rates might have on the financial system. Banks are used to positive interest rates. “This is how they make their spread. They might face difficulties making money and generating profits in a new world like this,” Goldstein said. If they are charged for putting money with the Fed, and “they can’t necessarily transfer the negative rates to their depositors, that might cause big difficulties for banks.”

Patrick Harker, president of the Federal Reserve Bank of Philadelphia, in a recent Knowledge@Wharton interview, made a related point: “We don’t have a lot of room to move rates.… Moving rates 50 basis points is not going to have a demonstrable effect. Then, it also creates other risks, because there’s a third component of the Fed, not in our dual mandate, but very important — financial stability. There is ample evidence that rates being this low for this long, start to create situations of financial instability….”

Nevertheless, the three panelists agreed that at this point, we are more likely to see negative rates than not.
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  #152  
Old 10-10-2019, 12:39 PM
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Mary Pat Campbell
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GREECE

https://www.ft.com/content/5dde46c4-...KEBOTe_Cf32DUo

Quote:
Greece joins club of negative-yielding debt issuers
Milestone comes alongside new record-low borrowing costs for Portugal
Spoiler:



The list of countries being paid to borrow by investors has an unlikely new member: Greece.

In a rally that has now swept through all corners of the eurozone debt markets, and that also shoved Portuguese borrowing costs down to record lows on Wednesday, the Greek government sold new three-month debt at a negative yield for the first time, meaning buyers were prepared to lock in a loss on their investment.

The milestone caps Greece’s extraordinary rehabilitation in the eyes of investors after it received multiple bailouts during the region’s debt crisis.

Athens raised €487.5m from its auction of 13-week bills at a yield of minus 0.02 per cent, compared with positive 0.10 per cent at the previous sale in August. Bills are a form of short-term government debt generally purchased by banks looking for somewhere to park their cash.

The decline partly reflects the fact that the European Central Bank cut interest rates by 0.1 percentage point to minus 0.5 per cent in September.

But the milestone — along with Tuesday’s sale of €1.5bn of 10-year bonds at a record low yield of 1.5 per cent — is also a sign that investors have grown more confident about the prospects for the Greek economy, which is forecast to grow at 2.8 per cent next year.

With the ECB also announcing the resumption of its bond-buying stimulus programme last month, markets are awash with cash drawn to the relatively high yield that Greek debt offers.

“This is a function of very low interest rates and QE, which begets more risk-seeking behaviour by investors,” said Peter Schaffrik, global macro strategist at RBC Capital Markets. Thanks to the ECB’s stimulus efforts, and gloom about prospects for the global economy, about two-thirds of the government debt in the euro area trades at a negative yield, including all German bonds.

Other former crisis spots such as Italy and Spain have already joined the negative-yield club, with Madrid being paid to borrow to maturities of up to nearly a decade.

Debt sales by Italy and Portugal on Wednesday further underlined the hunger for eurozone sovereign bonds, which is fuelled by bets that interest rate will stay at rock-bottom levels for years to come. Prices in eurozone money markets indicates that investors expect the ECB to hold interest rates below zero for the next seven years.

“If that’s the case, people will continue to grab anything with a bit of yield,” said Iain Stealey, head of international fixed income at JPMorgan Asset Management.

Italy secured more than $18bn of orders for $7bn of five-, 10-, and 30-year bonds as it returned to dollar markets for the first time since 2010. The new 10-year bond was expected to price at a yield just below 3 per cent, about 1.4 percentage points higher than the equivalent US government bond.

Portugal auctioned €750m in 15-year government bonds at a record low yield of 0.49 per cent. Demand for the auction of 15-year bonds was almost 2.5 times the amount on offer.

It was Portugal’s first bond auction since the ruling centre-left Socialists (PS) won a general election on Sunday, increasing their share of the vote, but falling short of an absolute majority.

The yield on the country’s benchmark 10-year debt has also dropped below that of Spain in recent days, a rare occurrence since the Iberian neighbours became eurozone members. Spain is heading towards a general election in November, its fourth in as many years.

The drop in yields, which move inversely to price, came after DBRS lifted Portugal’s debt rating by one notch to BBB (high) on Friday, the highest rating the Canadian rating agency has attributed to the country in eight years.

DBRS said on Monday the outcome of Portugal’s election pointed to a “broad continuity of domestic policies” in a country where “successive governments have shown a strong commitment to tackling economic and fiscal challenges”.

A government official said on Tuesday that Portugal would this month pay back €2bn to the European Financial Stabilisation Fund several years ahead of schedule, saving an estimated €120m in interest payments.

I am completely flummoxed. This is insane.
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  #153  
Old 10-11-2019, 04:24 PM
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Mary Pat Campbell
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GREECE

https://www.wsj.com/articles/greece-...ub-11570640925

Quote:
Greece, Once in Crisis, Joins Negative-Rates Club
Debt-laden country sells bonds yielding less than 0% for the first time
Spoiler:
Greece sold debt offering less than 0% for the first time on Wednesday in the latest sign of how far investors will go in a hunt for returns amid a global slump in yields.

The Greek government issued 487.5 million euros ($535.31 million) of three-month debt at a yield of minus-0.02%. At a previous auction for bills with similar maturity on Aug. 7, the rate was 0.095%.

The move reflects a broader shift in European bond markets in recent years, with investors paying governments from Germany and Switzerland to Italy to hold their money as the European Central Bank cuts borrowing costs to bolster economic growth in the region.

That also means investors are being forced to take on more risk to generate returns, with Greece long considered the final frontier.

The nation, which emerged in August 2018 from an eight-year international bailout program following a prolonged debt crisis, has been welcomed back into the bond market with strong demand for its debt. The falling borrowing costs in recent months are a sign that Greece is steadily becoming just another eurozone country in investors' eyes, after years when its survival in the common currency was in doubt.

"The general monetary-policy environment, not only in Europe but globally, helps issuers that have more debt on their balance sheet," saidAndrey Kuznetsov, senior portfolio manager at Hermes Investment Management. "The weak global macro environment combined with monetary-policy easing and bigger demand for fixed income from an aging population means that to deliver the same return, investors have to take on more risk."

The ECB took its key benchmark further into negative territory last month as it reduced the interest rate by one-tenth of a percentage point, to minus-0.5%.

The monetary authority also launched a sweeping package of bond purchases as concerns about the health of the eurozone economy persist, laying the groundwork for an extended period of easy money.

While the Greek government so far has issued only very short-term debt at a negative yield, other European governments are borrowing through longer-dated debt that pays no interest.

Germany, for example, sold 30-year debt at a negative yield for the first time in August.

The yield on the government debt has tracked improvements in the Greek economy, suggesting that debtholders are "not as worried they're going to lose money as they were in the past," according to Lefteris Farmakis, a strategist at UBS.

Greece's economy has been growing at around 2% a year lately, but remains deeply depressed after shrinking by over one-quarter during its financial crisis.

Under the bailout program, the country was forced to enact drastic fiscal retrenchment in exchange for loans from other eurozone countries and the International Monetary Fund.

The election of a pro-business, center-right government under Prime Minister Kyriakos Mitsotakis this July has further contributed to a sense that normality is returning.

Still, Mr. Mitsotakis's ability to loosen crisis-era austerity by cutting taxes remains constrained by the insistence of Greece's German-led creditors that Athens continue to run budget surpluses.

Doubts remain over the sustainability of Greece's debt in the long term, because its huge, cheap bailout loans from eurozone governments must eventually be replaced with market financing at uncertain cost.

Most investors believe Germany and others won't let Greece fall back into a crisis and will delay the loans' repayment if necessary.

"If Greece continues to do well and credit risk continues to go down, you could see rates go even more negative," Mr. Farmakis said.

Greece's first issuance after exiting the bailout program, in January, saw the debt office attract demand in excess of 10 billion euros for a 2.5 billion euro fundraising round.

Wednesday's issuance comes a day after Greece raised 1.5 billion euros from the sale of its existing March 2029 bonds at a yield of 1.50%. That marked a record low cost for its 10-year debt.

"The weak global macro environment combined with monetary-policy easing and bigger demand for fixed income from an aging population means that to deliver the same return, investors have to take on more risk," Mr. Kuznetsov said.


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  #154  
Old 10-11-2019, 04:24 PM
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Mary Pat Campbell
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Join Date: Nov 2003
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Favorite beer: Murphy's Irish Stout
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Default

GREECE

https://www.wsj.com/articles/greece-...ub-11570640925

Quote:
Greece, Once in Crisis, Joins Negative-Rates Club
Debt-laden country sells bonds yielding less than 0% for the first time
Spoiler:
Greece sold debt offering less than 0% for the first time on Wednesday in the latest sign of how far investors will go in a hunt for returns amid a global slump in yields.

The Greek government issued 487.5 million euros ($535.31 million) of three-month debt at a yield of minus-0.02%. At a previous auction for bills with similar maturity on Aug. 7, the rate was 0.095%.

The move reflects a broader shift in European bond markets in recent years, with investors paying governments from Germany and Switzerland to Italy to hold their money as the European Central Bank cuts borrowing costs to bolster economic growth in the region.

That also means investors are being forced to take on more risk to generate returns, with Greece long considered the final frontier.

The nation, which emerged in August 2018 from an eight-year international bailout program following a prolonged debt crisis, has been welcomed back into the bond market with strong demand for its debt. The falling borrowing costs in recent months are a sign that Greece is steadily becoming just another eurozone country in investors' eyes, after years when its survival in the common currency was in doubt.

"The general monetary-policy environment, not only in Europe but globally, helps issuers that have more debt on their balance sheet," saidAndrey Kuznetsov, senior portfolio manager at Hermes Investment Management. "The weak global macro environment combined with monetary-policy easing and bigger demand for fixed income from an aging population means that to deliver the same return, investors have to take on more risk."

The ECB took its key benchmark further into negative territory last month as it reduced the interest rate by one-tenth of a percentage point, to minus-0.5%.

The monetary authority also launched a sweeping package of bond purchases as concerns about the health of the eurozone economy persist, laying the groundwork for an extended period of easy money.

While the Greek government so far has issued only very short-term debt at a negative yield, other European governments are borrowing through longer-dated debt that pays no interest.

Germany, for example, sold 30-year debt at a negative yield for the first time in August.

The yield on the government debt has tracked improvements in the Greek economy, suggesting that debtholders are "not as worried they're going to lose money as they were in the past," according to Lefteris Farmakis, a strategist at UBS.

Greece's economy has been growing at around 2% a year lately, but remains deeply depressed after shrinking by over one-quarter during its financial crisis.

Under the bailout program, the country was forced to enact drastic fiscal retrenchment in exchange for loans from other eurozone countries and the International Monetary Fund.

The election of a pro-business, center-right government under Prime Minister Kyriakos Mitsotakis this July has further contributed to a sense that normality is returning.

Still, Mr. Mitsotakis's ability to loosen crisis-era austerity by cutting taxes remains constrained by the insistence of Greece's German-led creditors that Athens continue to run budget surpluses.

Doubts remain over the sustainability of Greece's debt in the long term, because its huge, cheap bailout loans from eurozone governments must eventually be replaced with market financing at uncertain cost.

Most investors believe Germany and others won't let Greece fall back into a crisis and will delay the loans' repayment if necessary.

"If Greece continues to do well and credit risk continues to go down, you could see rates go even more negative," Mr. Farmakis said.

Greece's first issuance after exiting the bailout program, in January, saw the debt office attract demand in excess of 10 billion euros for a 2.5 billion euro fundraising round.

Wednesday's issuance comes a day after Greece raised 1.5 billion euros from the sale of its existing March 2029 bonds at a yield of 1.50%. That marked a record low cost for its 10-year debt.

"The weak global macro environment combined with monetary-policy easing and bigger demand for fixed income from an aging population means that to deliver the same return, investors have to take on more risk," Mr. Kuznetsov said.


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