200 years of German bond yields

[Will Wiley]

Jim Reid had the following to say

The Moon landing, JFK's assassination, John Lennon's shooting, maybe even the Red Wedding episode from Game of Thrones. In years to come will they also be asking you where you were at the time you heard the news that 10 year Bund yields turned negative for the first time? For me it was in an airport in Vienna! Although there has been a creeping inevitability on this for several days now this landmark remains a truly remarkable event. If one wanted a simple indicator to reflect a broken financial system then this would be a strong candidate. In today's PDF we show 10 year Bund yields back to the early 1800s to put this move in some perspective. It's incredible when you think that the central bank responsible for the inflation rate in Germany has a target of (just below) 2% per year. Let us stress that until Governments/central banks change policy, yields are likely stay at ultra low levels due to secular stagnation type themes and the overwhelming amount of QE hoovering up bonds. However it still reflects a broken financial system.

 

[dismal]

Why does this mean there is "a broken financial system"?

 

[Will Wiley]

Why does this mean there is "a broken financial system"?

Jim Reid has argued that loose monetary policy (QE) can't go on indefinitely, and the inevitable tightening will be problematic

 

[dismal]

Why does this mean there is "a broken financial system"?

Jim Reid has argued that loose monetary policy (QE) can't go on indefinitely, and the inevitable tightening will be problematic

Low rates are a sign of a loose monetary policy?

They would seem to indicate a lack of inflation.

In addition, negative yields can really only be explained by many people having a need to park money in something more secure or practical than a mattress. I'm not sure this need is driven by monetary policy all that much.

 

[Will Wiley]

Jim Reid has argued that loose monetary policy (QE) can't go on indefinitely, and the inevitable tightening will be problematic

Low rates are a sign of a loose monetary policy?

Have you ever seen high rates and loose money?

In addition, negative yields can really only be explained by many people having a need to park money in something more secure or practical than a mattress. I'm not sure this need is driven by monetary policy all that much.

Then why haven't we had negative rates before? Didn't people need somewhere safer than a mattress in other times?

 

[dismal]

Low rates are a sign of a loose monetary policy?

Have you ever seen high rates and loose money?

I'm not sure exactly what you mean by "loose money". In general high nominal rates are a sign of high inflation. High inflation is associated with expansion of the money supply.

Then why haven't we had negative rates before? Didn't people need somewhere safer than a mattress in other times?

I don't think it's that mattresses are less safe, it's that some people (institutions) have large amounts of money to park and the practical implications of keeping it in currency and finding a big enough mattress (or a vault, perhaps more practically) aren't worth it so they park it in a low risk government bond, even if it has a negative yield.

Banks have also historically been preferable to mattresses as they have paid at least some token yield to depositors to encourage deposits. The broader question, I think, is why banks don't want the money. The inference would be they don't gain much by having deposits in the current environment. Why this might be is an interesting question. If I had to guess, this is what Reid is referring to when he says we have a "broken financial system".

 

[Horatio Parker]

There's this

International liquidity has plummeted from nearly 60% of global GDP in 2009 to barely 30% today. This change is due, equally, to downgrades in the ratings of heavily indebted crisis countries’ government bonds, which make them unattractive for use in international transactions, and the inelasticity of other sources of supply.

https://www.project-syndicate.org/c...idity-sharp-fall-by-barry-eichengreen-2016-06


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[laughing dog]

Why does this mean there is "a broken financial system"?

Jim Reid has argued that loose monetary policy (QE) can't go on indefinitely, and the inevitable tightening will be problematic

Tightening the money supply is always problematic for some sectors of an economy - that is the intermediate point of the policy.

 

[Will Wiley]

Jim Reid has argued that loose monetary policy (QE) can't go on indefinitely, and the inevitable tightening will be problematic

Tightening the money supply is always problematic for some sectors of an economy - that is the intermediate point of the policy.

But we aren't talking about any ordinary tightening...I'm sure Jim Reid is aware of that tightening can be problematic too. The point he makes is that we are in an extreme untested unprecedented situation.
That is the point of looking at 200 years of Bunds or 5000 years of interest rates. There is no period you can compare negative bond yields to.

Negative rates were never part of the playbook.

 

[dismal]

Tightening the money supply is always problematic for some sectors of an economy - that is the intermediate point of the policy.

But we aren't talking about any ordinary tightening...I'm sure Jim Reid is aware of that tightening can be problematic too. The point he makes is that we are in an extreme untested unprecedented situation.
That is the point of looking at 200 years of Bunds or 5000 years of interest rates. There is no period you can compare negative bond yields to.

Negative rates were never part of the playbook.

We do not generally have "negative rates". If you borrow money you will pay interest. If you lend money you can command interest.

What we have are a few securities that have been bid down to a negative yield. This does run contrary to the simple mattress theory (that interest can never be negative because people will get a higher return by sticking money in a mattress.)

I would take this solely as an indication that there is some factor causing this that the mattress theory does not contemplate. There is value to someone, somewhere to owning these particular securities that goes beyond the yield the bond provides.

If, for example, the government required every bank in the US to hold $10,000,000 in Croatian government bonds in order to do business, the banks would suddenly become very insensitive to the yield on Croatian government bonds until they had as many as they needed.

 

[jonatha]

I would take this solely as an indication that there is some factor causing this that the mattress theory does not contemplate.

Mattress theory assumes the mattress is free no matter how large it is.

 

[funinspace]

I would take this solely as an indication that there is some factor causing this that the mattress theory does not contemplate.

Mattress theory assumes the mattress is free no matter how large it is.

Does that conform to the Mattress Inflation theory? Sounds like a lot of hot air...

 

[SimpleDon]

It belittles the idea that the interest rate is the price of the debt. If the interest rate was the price of the debt and you have a shortage of secure financial instruments to facilitate trade the interest rate should be increasing, not decreasing.

 

[Horatio Parker]

I thought that's how bond markets work; yields fall as demand rises. If many people want to loan you money, it's cheaper.

But the part that doesn't make sense to me is if US Treasuries are in highest demand, why is their yield higher? Shouldn't they be among the first to go negative? Is the Treasury acting against the market, setting yields artificially high?

 

[laughing dog]

The negative German bond yields are due to the Islamization of Germany.

 

[Will Wiley]

I thought that's how bond markets work; yields fall as demand rises. If many people want to loan you money, it's cheaper.

But the part that doesn't make sense to me is if US Treasuries are in highest demand, why is their yield higher? Shouldn't they be among the first to go negative? Is the Treasury acting against the market, setting yields artificially high?

I think it would be both supply and demand.



Interestingly German bunds last went negative in 1922-23
And the last time the German bond stood negative was .... surprise surprise

 

[dismal]

I thought that's how bond markets work; yields fall as demand rises. If many people want to loan you money, it's cheaper.

But the part that doesn't make sense to me is if US Treasuries are in highest demand, why is their yield higher? Shouldn't they be among the first to go negative? Is the Treasury acting against the market, setting yields artificially high?

I think it would be both supply and demand.

Right, there may be institutions that have a preference or requirement for Bunds. I saw an article that suggested they were in high demand because European central banks were purchasing up much of the supply.

 

[Horatio Parker]

I thought that's how bond markets work; yields fall as demand rises. If many people want to loan you money, it's cheaper.

But the part that doesn't make sense to me is if US Treasuries are in highest demand, why is their yield higher? Shouldn't they be among the first to go negative? Is the Treasury acting against the market, setting yields artificially high?

I think it would be both supply and demand.

I don't know what you mean by this. If demand is high, then supply is low.

 

[Axulus]

I thought that's how bond markets work; yields fall as demand rises. If many people want to loan you money, it's cheaper.

But the part that doesn't make sense to me is if US Treasuries are in highest demand, why is their yield higher? Shouldn't they be among the first to go negative? Is the Treasury acting against the market, setting yields artificially high?

If US inflation is expected to exceed inflation in the Euro Zone, then we would not necessarily expect US bonds to go negative first.

 

[Horatio Parker]

Yes, that's it.

As Davitt implies, there is a correlation among government bond yields around the globe. But there remains a big difference between the German and Japanese economies on the one hand, and the American economy on the other. According to the latest figures from the OECD, inflation in German is mildly negative, and Japan is also experiencing deflation; the same report, which looked at annual inflation in the year ending April, placed U.S. inflation at 1.1 percent.

Since bond yields without credit risk are generally thought to include an inflation-compensating component and a "real rate" component (which should relate to the general supply and demand for funds), the higher inflation in the U.S. means that the real rate has to become that much more negative before the zero line is crossed.

"Our bonds have been negative a long time in a real sense, but not in a nominal one," Max Wolff, chief economist at Manhattan Venture Partners, said Tuesday on "Trading Nation."

http://www.cnbc.com/2016/06/15/us-bond-yields-could-soon-go-negative-strategist.html