Glorious times for Draghi’s scheme.
The negative-yield absurdity marked a new and glorious milestone just now: the 10-year yield on German government debt fell below zero for the first time ever. It is currently at -0.03%, bouncing up and down, kissing a positive yield before falling back in to the negative.
German government debt with shorter maturities has been negative for a while. The ECB has just started buying euro-denominated corporate bonds, in addition to government bonds, covered bonds, and asset-backed securities, in an effort to accomplish whatever schemes it has on its agenda. So even some corporate debt with short maturities has been trading at negative yields. But today marked the first time in Europe that 10-year debt has joined the club.
The German 2-year yield is down to -0.59%.
So what does this do for the banks and hedge funds and others who bought these bonds earlier, those that got the word years ago that Draghi would go bonkers and truly do whatever?
The price of a Bund that matures in July 2040 with a 4.75% coupon rose to 202.6 cents on the euro on June 13, according to the Bundesbank, more than doubling the money for investors that had gotten into the game early enough. They’re the real beneficiaries of Draghi’s well-engineered scheme.
Meanwhile, German stocks are in a bear-market, with the DAX down 23.2% from its April 2015 peak. The French CAC 40 is down 21.8%. The Spanish Ibex 35 and the Italian MIB are down 31.4% and 32.6% respectively. So this time around, central banks are lining the pockets very selectively.
But to realize that profit, bondholders have to sell the Bund rather than hanging on to it to collect the coupon and take the risk of getting wiped out later by inflation and/or rising rates. The remaining 24 years is a long time for shit to happen. And if they hold it to maturity, so until July 2040, they will only get 100 cents on the euro. So selling the Bund at the right time is the name of the game.
But no problem. The ECB is buying, and other desperate investors are buying too, even if they get their pockets cleaned out down the road – if this scheme ever unwinds.
And it might not unwind anytime soon. Look at Japan.
Japanese debt is the trailblazer. The bank of Japan invented QE and has run so many bouts of QE that it has named the current Abenomics bout “QQE” to make it sound more powerful than the prior bouts. QE in Japan includes equities with the purpose of propping up Japanese stocks. Alas, the Nikkei is still down ca. 60% from its bubble-peak in 1989. The BOJ has imposed a near-zero-interest-rate policy for two decades, with great success. But in February, it commenced its official negative-interest-rate policy.
So the 10-year JGB yield today dropped to another record low, -0.17% intraday before bouncing off smidgen. Even the 30-year yield is now a minuscule 0.22%. And this in the world’s most fiscally desperate government whose debt now amounts to 250% of GDP, after years of borrowing around 50% of its outlays, thus piling up an ever grater mountain of debt that the BOJ is now eagerly buying.
The contagion from these policies in Europe and Japan are spreading around the world, particularly to the US, as NIRP refugees are seeking salvation in higher-yielding lands, and this demand is pumping up the prices of Treasuries and of even of the riskiest junk bonds, driving down their yields in the process.
Now speculators are not only playing the Draghi and BOJ scheme, trying to front-run their next move, but they’re also fretting about or betting on the infamous Brexit, whose probability had been written off not too long ago as too low to worry about. But a slew of recent polls are showing that the “leave” vote is picking up momentum and might actually carry the day. Apparently, the formerly “undecideds” are becoming more decided to bail out of the European circus.
With London being one of the largest financial centers in the world, the idea of a successful Brexit is disrupting financial thinking and speculation. It’s coinciding with, and possibly amplifying the negative-yield absurdity – where investors pay for the privilege of lending money to borrowers; where the cost of capital for some entities, and thus the value of capital, is negative; where risks of whatever kind can no longer be meaningfully calculated in financial terms; and where betting with or against central banks, rather than investing, is the only game in town.
And so the dollar’s global “hegemony” meets NIRP. Read… “Death of the Dollar” Not Yet
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