Fucking idiots. We all had enough of them shafting us all when it all ended in tears last time round.
There’s a multitrillion-dollar black hole growing at the heart of the world’s financial markets. Negative-yielding debt -- bonds worth less, not more, if held to maturity -- is spreading to more corners of the bond universe, destroying potential returns for investors and turning the system as we know it on its head. Now that it looks like sub-zero bonds are here to stay, there’s even more hand-wringing about the effects for mom-and-pop savers, pensioners, investors, buyout firms and governments.
1. Why invest in a bond that will lose you money?
Typically, bonds are the safest assets on the market, so many investors seek them out at times of heightened market stress, say a U.S.-China trade war or tensions in the Persian Gulf. A bond can have a modestly positive coupon when issued by a government, institution or company, but once it starts trading, high demand by investors can push its price up -- and therefore its yield down -- to such an extent that buyers no longer receive any payment. Some funds track government bond indexes, meaning they must buy the bonds regardless of the yield. And some investors can still make positive returns on these bonds when adjusted for currency swings.
2. How much is being bought?
Negative-yielding debt topped $13 trillion in June, having doubled since December, and now makes up around 25% of global debt. In Germany, 85% of the government bond market is under water. That means investors effectively pay the German government 0.2% for the privilege of buying its benchmark bonds; the government keeps 2 euros for every 1,000 euros borrowed over a period of 10 years. The U.S. is one of the few outliers, with none of its $16 trillion debt pile yielding less than zero, but across the world, strategists are warning that the problem may get worse.
3. Why is this reason for worry?
Negative rates are at odds with basic principles of the global finance system. “One important law of financial logic –- if you lend money for longer, you should see a higher return –- has been broken,” wrote Marcus Ashworth, a Bloomberg Opinion columnist covering European markets. “The time value of money has essentially disappeared.” (Has it ever: The so-called century bonds issued by Austria two years ago, which mature in 2117 and initially offered a 2.1% return, now yield about 1.2%.) All this can push investors into riskier bets in the hunt for returns, raising the chances of bubbles in financial markets and real estate.
4. Who benefits from negative rates?
Governments, for one. The incentive to borrow money is never greater than when you are being paid to do so. Germany, for example, is being subsidized to issue debt over the next 20 years, though that does not necessarily mean it will boost spending. Companies that issue bonds also reap the benefits of record-low borrowing costs. So do private-equity firms, which typically use leverage to acquire companies and see greater opportunities when (and where) capital is cheap. Homeowners with variable-rate mortgages also have reason to celebrate.
5. Who gets hurt?
Pension funds and insurers, traditionally big investors in government bonds, are in a particular predicament: Their liabilities grow steadily as clients age, but often they are required not to take on big risks. Banks see their margins squeezed. They’re earning next to nothing from lending but still need to offer depositors a rate above zero to keep their business. In Germany, the ECB has come under political pressure for hurting the returns of savers. Central banks could run into the problem of hitting the so-called “reversal rate” -- the point at which low borrowing costs start to harm rather than help the economy, should banks start to restrict loans. That could deepen any slowdown.
6. How did we get here?
Several of Europe’s central banks, otherwise unable to spur growth in the aftermath of the 2008-2009 financial crisis, cut interest rates below zero in 2014. Japan soon followed. The idea was to spur lending by charging financial institutions, rather than rewarding them, for parking money that otherwise could be put to use in the real economy. Since 2016, the ECB’s benchmark rate has been -0.4%, meaning banks lose 4 euros to store 1,000 euros there. The sub-zero rates were supposed to be temporary but have endured. Traders are betting that the ECB will push its deposit rate ever more negative this year, driving record levels of bond yields below zero.
7. Why have negative rates lasted so long?
More than a decade on from the credit crisis, inflation is still scarce, with wages increasing only modestly despite large drops in unemployment. The ECB, for example, isn’t expected to get to its close-to-2% inflation target over the next decade, according to a market-derived measure. And the yield difference between U.S. three-month bills and 10-year Treasuries is inverted, an indication that an economic contraction may be coming. Aside from the U.S. Federal Reserve, few central banks that slashed interest rates during the credit crunch have managed to raise rates, meaning that during the next downturn they are likely to head further into negative territory.
8. Where’s all this heading?
In Europe, there are fears that the continent is following the path of Japan’s so-called lost decade, where policy makers struggled to revive anemic growth and inflation. Central banks have been keen to iterate that they still have tools in their locker to combat any slowdown, including rate cuts and more quantitative easing. For markets, waning volatility is bad for trading. Geopolitical tensions over trade, and Britain’s exit of the European Union will keep driving investors into the safest assets, meaning demand will remain high for negative-yielding debt. But the push to find juicier returns with riskier bets raises the prospect of further fund failures or a new crisis.
Two summers ago, the head of Britain’s Financial Conduct Authority, Andrew Bailey, made news when he announced that LIBOR – the leading benchmark for setting global interest rates – had a “sustainability” issue. The rate is supposed to measure the rate at which banks borrow from each other, but Bailey said it wasn’t based on real borrowing
I'm about half an hour in. Not sure what to make of it. Good criticism of neoliberalism, inequality and austerity but hopefully it'll lead to some concrete analysis and some options for alternatives.So what are the key points he makes in this 100 minute video you've linked to?
I've watched it up to the questions.I'm about half an hour in. Not sure what to make of it. Good criticism of neoliberalism, inequality and austerity but hopefully it'll lead to some concrete analysis and some options for alternatives.
The world turned upside down?It is a topsy-turvy world in which unemployment is at record low levels, but the Fed is worrying not that that the economy is overheating but that inflation is too low. Powell is trying to sell the rate cut as no more than a “mid-cycle correction,” but for the Fed to be cutting rates as “insurance” at the peak of the cycle is hardly conventional. Meanwhile, the U.S. government is set to issue more than $2.5 trillion in new debt in the space of two years, and the markets have not blinked. Investors consider the risk of inflation so low that they will hold $12.5 trillion of European and Japanese bonds at negative yields.
Faced with BlackRock’s shameless demand for public support of equity markets, one Financial Times commentator exclaimed that the proposal amounted to claiming that “the only way to save capitalism is to begin to nationalise it.” True. But why, in light of the measures taken to rescue the banks in 2008, is that surprising? The question today is not whether the state should act to support the feeble rate of economic growth but which policy tools will actually work.
Not quite. And some mergers of already Leviathan companies happening ..presumably because some serious players want to cash out. This near full employment. .how much of that work could be automated? And how much of a skills shortage is there in areas where that would be harder to do that? A good time to incentive training and reskilling
NASA worked out how to make food out of thin air - and it could feed billions
Very interesting. Worth noting that it's not CO2 "capture" per se because that carbon ends up being returned to the air via breathing and decay. I'd also like to know the power requirements and therefore the "nutirition per m² of solar panels" vs "nutrition per m² of wheat field".
China’s sovereign wealth fund has taken over HengFeng Bank, a troubled lender linked to fugitive financier Xiao Jianhua, in the third case in as many months of the state exerting its grip over wayward financial institutions.
It’s also the second of several banks in Xiao’s financial empire to be put under state ward, after the May 24 nationalisation of Baoshang Bank in Inner Mongolia’s Baotou city.
Xiao’s Tomorrow Group, which owned 89 per cent of Baoshang, had misappropriated large sums from the bank, triggering serious credit risks that prompted the government to step in, the central bank said.
Xiao himself had not been seen in public since he was persuaded to return to mainland China from Hong Kong on the eve of the 2017 Lunar New Year to help with investigations into his financial affairs.