Thursday, May 30, 2013

30/5/2013: Future Interest Rates & the 'Impossible Monetary Policy Dilemma'

Recently, I wrote about the monetary policy exit dilemma (here) on foot of IMF research. This week, BIS published another paper on the issue of long-term interest rates problem presented by the need to eventually unwind the extraordinary monetary policy measures (including this). Do note that the dilemma also covers the problem of unwinding banking sector leverage overhang (see presentation covering, among other things, this matter here).

BIS paper is linked here.

We might want to believe in the permanence of the low (negative currently) long term rates, but, alas, that is not so. I have written about this on a number of occasions, including in my Sunday Times columns. But a reminder from BIS:

Or even at policy rates level (here), or per BIS:

I don't know about you, but any reversion to the mean will end the bond bubble like the property bust ended the REITs bubble - solidly and overnight. And when the IMF said 6% swing up on yields, they weren't kidding:

Ditto for term premium uplift on reversion:

So unless you are into 'This Time It'll Be Different, For Sure' argument, then brace yourselves for the ride - it is coming. May be not in 2013-2014, but one day it is...

The quality risk-free paper mountain has grown... just as all the ABS and RMBS and other BS... and we know even absent excel errors from R&R 2010 how that stuff ended...
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