The NIRP Refugees Are Coming to America

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Negative interest rate policies elsewhere hit US Treasury yields

The side effects of Negative Interest Rate Policies in Europe and Japan — what we’ve come to call the NIRP absurdity — are becoming numerous and legendary, and they’re fanning out across the globe, far beyond the NIRP countries.

No one knows what the consequences will be down the line. No one has ever gone through this before. It’s all a huge experiment in market manipulation. We have seen crazy experiments before, like creating a credit bubble and a housing bubble in order to stimulate the economy following the 2001 recession in the US, which culminated with spectacular fireworks.

Not too long ago, economists believed that nominal negative interest rates couldn’t actually exist beyond very brief periods. They figured that you’d have to increase inflation and keep interest rates low but positive to get negative “real” interest rates, which might have a similar effect, that of “financial repression”: perverting the behavior of creditors and borrowers alike, and triggering a massive wealth transfer.

But the NIRP absurdity has proven to be possible. It can exist. It does exist. That fact is so confidence-inspiring to central banks that more and more have inflicted it on their bailiwick. The Bank of Japan was the latest, and the one with the most debt to push into the negative yield absurdity — and therefore the most consequential.

But markets are globalized, money flows in all directions. The hot money, often borrowed money, washes ashore tsunami like, but then it can recede and dry up, leaving behind the debris. These money flows trigger chain reactions in markets around the globe.

NIRP is causing fixed income investors, and possibly even equity investors, to flee that bailiwick. They sell their bonds to the QE-obsessed central banks, which play the role of the incessant dumb bid in order to whip up bond prices and drive down yields, their stated policy. Investors take their money and run.

And then they invest it elsewhere — wherever yields are not negative, particularly in US Treasuries. This no-questions-asked demand from investors overseas has done a job on Treasury yields. That’s why the 10-year yield in the US has plunged even though the Fed got serious about flip-flopping on rate increases and then actually raised its policy rate, with threats of more to come.

So here are some of the numbers and dynamics — among the many consequences of the NIRP absurdity — by Christine Hughes, Chief Investment Strategist at OtterWood Capital:

Negative interest rate policies implemented by central banks in Europe and Japan have driven yields on many sovereign debt issues into negative territory.

If you look at the BAML Sovereign Bond index, just 6% of the bonds had negative yields at the beginning of 2015. Since then the share of negative yielding bonds has increased to almost 30% of the index, see below.

With negative yielding bonds becoming the norm, investors are instead reaching for the remaining assets with positive yields (i.e. US Treasuries). Private Japanese investors have purchased nearly $70 billion in foreign bonds this year with the sharpest increase coming after the BoJ adopted negative rates. Additionally, inflows into US Treasuries from European funds have increased since 2014:

“According to an analysis by Bank of America Merrill Lynch, for every $100 currently managed in global sovereign benchmarks, avoiding negative yields would result in roughly $20 being pushed into overweight US Treasuries assets,” wrote Christine Hughes of OtterWood Capital.

That’s a lot of money in markets where movements are measured in trillions of dollars. As long as NIRP rules in the Eurozone and Japan, US Treasury yields will become even more appealing every time they halfheartedly try to inch up just one tiny bit.

So China, Russia, and Saudi Arabia might be dumping their holdings of US Treasuries, for reasons of their own, but that won’t matter, and folks that expected this to turn into a disaster for the US will need some more patience: these Treasuries will be instantly mopped up by ever more desperate NIRP refugees.

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  11 comments for “The NIRP Refugees Are Coming to America

  1. d'Cynic
    May 26, 2016 at 5:56 pm

    If you read some headlines in EU including ECB, they blame the outflow of funds from Europe on the populist, nationalist movements. MSM media at it’s best.
    Here is my recipe to the problem of disappearing inflation.
    1. Deflate the housing bubble which is nothing but hyperinflation in a major life necessity.
    2. Population can afford their mortgages, creating disposable income.
    3. Inflation soars.
    4. Interest rates normalized.
    5. Remove central banks power to manipulate markets. Lender of last resort, period.

    • OutLookingIn
      May 26, 2016 at 7:27 pm

      Not going to happen. Don’t look for it.
      Corruption is now, too deeply entrenched.

      May 27, 2016 at 9:12 am

      Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta, wrote in 1934:
      If all bank loans were paid, no one would have a bank deposit, and there would not be a dollar of currency or coin in circulation. This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon.

        May 27, 2016 at 12:01 pm

        The “Treasury” of our own nation should issue our own currency. Why a private organization has this “right” is amazing. Currency is nothing but a receipt for GOLD held in the Treasury to back up the paper notes. The US DOLLAR NOTES could be exchanged at anytime for lawful money, redeemable in GOLD at the Treasury.

        Not enough “currency” for a growing population? Well, you don’t need a growing currency since with industrialization and product improvement and productivity increases, prices will always drop in a Free enterprise, gold based, economy.

        That is why from 1865 to 1913 prices dropped automatically in every field for every product. Nobody in their right mind opens a new factory to charge more for the same product being produced by an existing factory. Nobody invents a new production process that increases the cost of the same product from the previous method.

        Inflation is/was INTENTIONAL to bail out the bond holders as they saw prices dropping and newer factories/railroads/coalmines were able to lower prices. The “old” bond holders were going under and these powerful and rich families could not allow that.

        Thus the Private Fed and paper currency.

        BUT, if you need more currency, the Treasury can always coin more coin from silver or copper (as they did). OR, the Treasury could announce a change in the GOLD vs Dollar exchange rate, in advance, or on a known schedule, so those who held gold benefited from this “inflation”.

        Rather, Roosevelt “stole” gold from the people at a low price and then sold this gold to the Private Federal Reserve Company for a higher price, thus giving the Government, and private families, the benefit while the stupid people lost out with higher prices. Very, very clever. The Government got more spending money and the Private Families got the GOLD by issuing printed paper.

  2. nick kelly
    May 26, 2016 at 6:01 pm

    In the latest sale of treasuries- some primary dealers did not get any. I guess 1.7 % can look pretty good- relatively.

  3. OutLookingIn
    May 26, 2016 at 7:29 pm

    U.S. Treasuries –

    The best looking corpse in the morgue.

  4. Ptb
    May 26, 2016 at 7:52 pm

    USD gets a boost

  5. d
    May 26, 2016 at 10:14 pm


    One could almost wonder if part of the Public and direct very vocal NIRP policy’s in Europe andJjapan is to hold up the $ Price.

    Although this has not worked particularly well for Japan. Yet.

    There is no question there is a growing movement from the EUR/Europe to the $.

    US Treasury auctions are oversubscribed and the Yield on them is accordingly low.

    One could probably sell all of the Russian, Saudi, and chinese Treasury’s in a morning, and the Next Treasury auction, would still be oversubscribed.

  6. Steve M
    May 26, 2016 at 11:24 pm

    So let me get this straight:

    NIRP means that you no longer own money. So you’re renting?

    And in the U.S, someone is still willing to pay you for what you have, whatever it’s worth?

    And the central banks of both systems are backed primarily by government IOU’s?

    What’s the punchline from that old Cheech and Chong sketch, where one of them plays a Japanese kamikaze pilot in WW II?

  7. Vookz
    May 27, 2016 at 12:33 am

    ‘NIRP refugees’
    Prefect descriptor

  8. Jerry
    May 27, 2016 at 3:09 am

    Christine Hughs is hot and intelligent.


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