Bond rates

[joe sod]

Now if you are a bond/hedge or pension fund manager would you lock up 4 billion of 10 year notes at 1.123 rate which is less than inflation

thats whats mind blowing why are they still rushing to buy these bonds when interest rates are almost nothing ??, it doesn't make sense. The money invested in bonds is increasing while interest rates are falling , this should not be happening !!. At the same time little new money is flowing into european stock markets they have been range bound since 2015.
Normal financial theory says that when interest rates are falling money flows from bonds to stocks, in europe its almost the reverse now.

 

[Sarenco]

Normal financial theory says that when interest rates are falling money flows from bonds to stocks, in europe its almost the reverse now.

I'm sure you're right but can you point me to anything at all that backs this up?

By interest rates I assume you mean bond yields.

I agree that it would seem odd that money would flow from equities to bonds (if that is, in fact, the case in Europe) when bond yields are falling. Although, to be fair, equities are pretty richly valued at the moment by historic standards.

Maybe regulators are requiring banks to load up on government bonds?

Either way, I'm pretty sure the smart folks that make up the bond market have it pretty much right.

 

[WolfeTone]

Excellent post @joe sod , World turned upside down.
The USSR did the same thing, except they managed their economy from a political ideological perspective rather than a purely "cash is king", "money talks" perspective.
The US, EU, UK, Japan and others are all caught in debt trap. China is caught too, because it is too interlinked with US.
Trump is trying to break Chinese as Reagan did the USSR. He may have some success, as China is still a broadly underdeveloped economy as the USSR was. For sure it has centres of high value capital, but there are still large underdeveloped rural regions with large populations.
There are some significant differences. China holds alot of US debt and China is quite technologically developed - Huawei, for instance.

In the end, the monetary system is now broken. The normal rules dont apply. It is a debt based system. To stay ahead, developed economies need to borrow more and more. Notions of paying off debt are fanciful.

 

[BilliamD75]

thats whats mind blowing why are they still rushing to buy these bonds when interest rates are almost nothing ??, it doesn't make sense. The money invested in bonds is increasing while interest rates are falling , this should not be happening !!. At the same time little new money is flowing into european stock markets they have been range bound since 2015.
Normal financial theory says that when interest rates are falling money flows from bonds to stocks, in europe its almost the reverse now.

The only people buying government bonds in Europe is the ecb or entities mandated (pension funds) to buy. Nobody in the private sector would buy as its a guaranteed loss at those rates even if its just to park money.

 

[Firefly]

The ntma has stated recently that interest costs were 33 billion for the last 5years and 60 billion over the last 10 years

Wow...wouldn't that have built some much needed infrastructure?!!!

If only we didn't borrow to pay the wages from the years 2009 - 2012 we'd have plenty room to borrow for much needed infrastructure now that rates are so low. Ah well...."Eaten bread is soon forgotten" and all that!

Advocating that we borrow now just because interest rates are low is IMO reckless. Many people are still paying for doing just that during the Celtic Tiger.

Our national debt is enormous.
Our economy is flying.
Pro-cyclical economics is a bad idea.

We should be running a surplus, saving money for a rainy day & paying down our national debt.

Thank God for those fiscal rules!

 

[Sarenco]

The only people buying government bonds in Europe is the ecb or entities mandated (pension funds) to buy. Nobody in the private sector would buy as its a guaranteed loss at those rates even if its just to park money.

The FTSE EMU Government Bond Index has returned over 6% YTD.

Plenty of gurus were also predicting "guaranteed losses" at the start of the year...

 

[WolfeTone]

Wow...wouldn't that have built some much needed infrastructure?!!!

It would of course. Only we borrowed money so we owe the interest on it. If we renege on our debt obligations then that is economic suicide.
You cant have it both ways, we can either choose to pay down debt and forgoe much needed infrastructure, or build much needed infrastructure to sustain economic development over the time ahead instead of paying down debt.
Paying down the debt is theoretically prudent. But the needs of the economy to sustain economic development far outweigh the benefits of shaving a few billion off the national debt.
I mean, how much national debt needs to be paid off before we should start borrowing for much needed infrastructure? €10bn, €20bn, €30bn??

 

[BilliamD75]

The FTSE EMU Government Bond Index has returned over 6% YTD.

Plenty of gurus were also predicting "guaranteed losses" at the start of the year...

Yes that's right, they are bonds held in the private sector with average yields of 4.25% depending on value and maturities.

 

[WolfeTone]

Its being reported on RTE that the ECB is open to more rate cuts.

ECB opens door to rate cuts, more bond buys

European Central Bank President Mario Draghi said the bank's all-important inflation target should not be viewed as a 2% cap.

www.rte.ie

"Expectations of new ECB stimulus have already driven down borrowing costs for euro zone governments, with the yield on Germany's 10-year bond delving deeper into negative territory at -0.41% today - close to a record low."


"Draghi has just three months left of his eight-year tenure, giving him only a handful of opportunities to secure his legacy"

 

[BilliamD75]

Yes hardly a surprise however what is a very important statement is inflation should not be viewed as a 2% cap (Draghi). I have been saying inflation is irrelevant. Without the ecb intervention we would be paying 9 billion minimum on our debt. The ecb is half pregnant with almost 40% government debt. The tipping point is Lagarde, does she go like boj and buy all the bonds (euro bond) with no private sector bids or pull back and do something similar like the fed with about 10% government debt. Thankfully the Germans are against this. My own opinion is political integration through monetary policy (eurobond), I wonder what language we will use (bonjour)

 

[joe sod]

The ecb is half pregnant with almost 40% government debt. The tipping point is Lagarde, does she go like boj and buy all the bonds (euro bond) with no private sector bids or pull back and do something similar like the fed with about 10% government debt.

why does the fed only have 10% government debt compared to the ECB of 40%, the US were doing quantitive easing long before the ECB?, Is it because the FED were buying more corporate debt than government debt compared to the ECB, and did the ECB buy only government debt, did they buy any corporate bonds?
Why is it an issue anyway for the ECB to have so much government debt, afterall they print euros out of nothing. I know Venezuala and Zimbabwe did not get away with it and their currencies collapsed, but they were one trick pony economies. In the case of Japan even with buying so much japanese debt they had deflation not inflation, the japanese yen increased its buying power over those decades. I am posing these questions because I dont understand either.
Is it because Japan is a highly productive technological economy so still produces alot of stuff the rest of the world needs to buy. the US with it technology dominance is also in that bracket. However is Europe now? , Germany the only real technology powerhouse is faltering, the car industry is going backwards .

 

[BilliamD75]

That's a lot of questions that cannot be answered on a single thread. Entities buy government debt just to get yield and their money back when due.
I will stick to the bonds (public) in the central banks. Most of the US government debt(21 trillion) is held outside of the US, the fed hold about 10%(,thats why the dollar is the world's reserve currency as its global) . The boj hold almost 95% government debt and continually repurchase the debt as there is no bids internationally as its a rigged system its just to fund the government , thats why there is no investment from the public side causing deflation. (yes they can print there own currency however from an international perspective would you lend money into that economy). The ecb is half way there (2.6 trillion) , if it buys all the bonds(euro bond) then it's just to finance government with no investment internationally on the public side, (yes it can print euros however we will need loads of wheelbarrows to carry the cash around) from an Irish perspective and being part of the global food chain it would be a disaster.I hope this helps.

 

[Protocol]

thats whats mind blowing why are they still rushing to buy these bonds when interest rates are almost nothing ??, it doesn't make sense. The money invested in bonds is increasing while interest rates are falling , this should not be happening !!. At the same time little new money is flowing into european stock markets they have been range bound since 2015.
Normal financial theory says that when interest rates are falling money flows from bonds to stocks, in europe its almost the reverse now.

There are lots of buyers of Govt bonds, even at low yields.

Take Irish CU for example, with surplus deposit liabilities, they buy Govt debt.

Pensions funds, etc., lots of buyers, even of 10yr bonds yielding 0%.

Note that as yields have fallen, bond prices rise, so these buyers have done well.

 

[joe sod]

(yes it can print euros however we will need loads of wheelbarrows to carry the cash around) from an Irish perspective and being part of the global food chain it would be a disaster.I hope this helps.

but it has been printing lots of euros to buy the government bonds, like japan has and like the US has. But the currencies have not collapsed , inflation is non existent, the oil and commodities are not going up in price like you would expect with devaluing currencies. If the biggest buyers of sovereign bonds are the central banks themselves and not the private sector, if the european and global stock markets (ex US) are barely moving , the ftse 100 and european stock markets are still more or less at levels they were at in year 2000 (ftse 100 at 7200 in year 2000, now at 7500 in 2019) . So the quantitive easing euros are not going into the stock markets.

I think I am now realising whats happening all these new euros are not being spent in the private sector by and large as little inflation, but by governments and the public sectors , the quantitive easing has really just allowed overly indebted governments like ours to keep spending. Its socialism financed by the bond markets, but how long can it last? so far so good

 

[Protocol]

Note that ECB purchases of Govt debt has stopped, since Dec 2018.

Asset purchase programmes

outright monetary transactions

www.ecb.europa.eu

 

[Protocol]

Joe sod,

be careful, the ECB buys the Govt bonds, and pays the previous owners, who are typically banks/pension funds, etc.

Govts do not directly receive revenue in these transactions.

Yes, Govts do benefit indirectly, as their borrowing costs fall.

 

[Protocol]

Yes, although QE has not led to consumer price inflation, there has been asset price inflation, e.g. US stocks and property prices round the world.

 

[BilliamD75]

There are lots of buyers of Govt bonds, even at low yields.

Take Irish CU for example, with surplus deposit liabilities, they buy Govt debt.

Pensions funds, etc., lots of buyers, even of 10yr bonds yielding 0%.

Note that as yields have fallen, bond prices rise, so these buyers have done well.

Are you saying that credit unions with excess liquidity are buying 10y Irish government bonds at 0%interest with inflation at 1.5% average across the eurozone losing 15% minimum nominal value plus costs with no access which will be purchased by the ecb through secondary market participation ending up with toxic Italian government debt. With this kind of thinking I am going to the credit union and taking my money out as it is not safe.

 

[Protocol]

Each CU is different.

I read the annual accounts of two / three CU.

They place their customer deposits on deposit with the main banks.

They also buy Govt bonds.

They can't buy equities or properties, so deposits and safe bonds are really the only places to hold surplus savings.

Of course, it would be preferable if their lending increased to be closer to the deposits.

 

[joe sod]

be careful, the ECB buys the Govt bonds, and pays the previous owners, who are typically banks/pension funds, etc.

Govts do not directly receive revenue in these transactions.

is that not just sleight of hand, they say they do not buy bonds directly when they are issued but they buy them in the market creating an artificial demand and lowering the interest rates to nothing, where would interest rates be if the central banks were not buying,?also where would the italian, irish and greek governments be, they would be bankrupt , thats where they were heading in 2011 before draghi stepped in.

They can't buy equities or properties, so deposits and safe bonds are really the only places to hold surplus savings.

the bond markets are really rigged, you have the central banks creating this huge artificial demand and then you have the banks ,pension funds etc forced to buy them and getting nothing. Imagine where the stock markets would be if they had these huge forcerd buyers?