Friday, September 5, 2014

5/9/2014: ECB, Zero Rates, Negative Yields and Debt... The Glorious Debt...

As I noted yesterday on twitter, the ECB policy rate change might be accommodative of the upcoming September TLTROs (by lowering the gross cost of using TLTROs to raise funds), but in reality all it is doing is continuing to push more debt accommodation for the already heavily-accommodated sovereigns. I also noted yesterday that this accommodation of banks and sovereigns has done preciously little to improve lending conditions for the real economy (

So here is a neat summary table showing the extent and spread of negative rates on 3 year government bonds - the table is courtesy of @Schuldensuehner (click on the image to enlarge):

In simple terms, if you want to lend money to Austrian, German, Belgian, French, Finnish, Dutch and Slovak Governments, you now have to pay for the privilege. It is as if there is a panic dumping of cash going on out there, under some grave threat of eminent expropriation or a meltdown of the entire financial system.

You betcha the Euro needs a traditional QE at this stage, because Belgium borrowing at negative rates is just not good enough, more debt is needed to fund more debt needs so the governments can spend more to stimulate tax revenues to sustain higher demand for debt yet... This, in a nutshell, the modern monetary policy, then.

And meanwhile, having crossed into the negative territory, bond yields opened up a new horizon for price appreciation for Government paper: higher debt supply, must equal higher price, inverting everything - from fundamentals to bounds on price appreciation. If you ever needed a sight of a bubble wobbling in the sun from the internal perturbations of hot air, give it another look... before it pops one day...
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