NIRP Absurdity Sets Record, Euro Stocks Drown in Bear Market

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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  32 comments for “NIRP Absurdity Sets Record, Euro Stocks Drown in Bear Market

  1. Jun 14, 2016 at 10:55 am

    The NIRP is yet another example of what AA calls “stinkin’ thinkin’.”

    While the chain of logic within their self-referential reality “bubble” may be impeccable, when examined/evaluated from the perspective of the larger aggregate socioeconomic “reality” bubble, it is apparent it is contradictory, dysfunctional and counter-productive.

    The foundational problem appears to be the separation/isolation of the central bank leadership from the “real world” of the large majority, and thus a leadership/institutional mental health problem [ schizophrenia ] rather than any lack of training, ethics, or intelligence. What is needed is the financial equivalent of Thorazine

    • marty
      Jun 14, 2016 at 12:58 pm

      I would have suggested high dose Niacin, but these are central banks of which we speak. May they die of liver damage. ;-) And soon.

  2. OutLookingIn
    Jun 14, 2016 at 11:05 am

    Physical gold & silver positive.

    The ultimate of safe havens for wealth preservation.

    The old adage that ‘gold does not generate interest or coupon’ no longer holds sway, when bond yields are at ZIRP or NIRP

    What would you prefer, a return ON your wealth? Or the return OF your wealth?

    • nhz
      Jun 14, 2016 at 1:44 pm

      I don’t doubt our crooked politicians and central bankers have a solution for little people who try to hold on to their wealth. If gold and silver really get going, it will be easy to outlaw them or declare any owner a ‘terrorist’. Just look how desperate their measures already are, these criminals will stop at nothing.

    • Jun 15, 2016 at 8:29 am

      If the economy crashes worldwide then gold and silver will crash with it in value. One would still have a hard asset with hopes that its value will return. I sit on cash in hopes of deflation as I see no reason to chase meagar gains while risking 100% of my capital in this insane invirement. Im debt free.

      • nhz
        Jun 15, 2016 at 11:02 am

        I’m in cash with a bit of gold, but if you have lots of cash you still have big risks due to potential implosion of the banking system.

        If things go wrong no bank will be safe, and currency at home might prove worthless as well. The politicians will always decide in favor of the big crooks, and sometimes the big majority of voters like all thoe with a mortgage, and enforce their ‘fair’ decisions at gunpoint.

        people with significant cash are a tiny minority in most of the west.

  3. Vooks
    Jun 14, 2016 at 11:16 am

    No news on Microsoft’s Linkedln buy?

    • West
      Jun 14, 2016 at 3:47 pm

      No kidding, this has to rank up there with say AOL/TW, Home Depot/Hughes Supply, Blackstone buying Hilton.

    • Jun 14, 2016 at 5:35 pm

      I’m going to write about it when Microsoft starts charging off much or all of the acquisition, booking perhaps $20 billion or more in losses, spread over three or so announcements over a two-year period, each associated with many thousands of layoffs. Nokia will be the model to follow. Only worse.

      And they’re likely to ruin LinkedIn.

      • West
        Jun 14, 2016 at 6:15 pm

        Slight difference – NOK made sense at the time, and could have been accretive had they stuck with their original plan and executed it well.

        LNKD makes no sense (to me anyways). Wouldn’t be surprised to see the price target move down if we have a correction prior to the deal closing.

      • Petunia
        Jun 14, 2016 at 6:59 pm

        The price is sooo ridiculous that it looks like a money laundering scheme. I’m not joking either.

        • VegasBob
          Jun 14, 2016 at 7:36 pm

          It’s the result of absurdly low interest rates.

          When the cost of ‘capital’ is negligible, many idiotic ‘investments’ start to make sense.

        • Marty
          Jun 14, 2016 at 8:39 pm

          Petunia, you can make the argument that large swaths of the software industry is devoted to money laundering. See Richard Andrew Grove about Marsh and Mclellan and 911.

  4. Paulo
    Jun 14, 2016 at 11:26 am

    Surely, this cannot continue on in scope and duration like Japan. I would think before this trend hits NA the whole kit and kaboodle will have already collapsed?

    Oh well, my wife and I are spending some money today on a lunch out. I suppose if it gets worse we’ll just buy whatever, no use saving anything? (hmmm, playing into their hands).

    • Ptb
      Jun 14, 2016 at 12:02 pm

      Japan’s been over 20 years now and we’re closing in on 10 years in the US. I’d say this is a strong trend.

  5. Ptb
    Jun 14, 2016 at 11:59 am

    The debt markets seem to indicate the real story of the world economy….nothing really going on.

    • Marty
      Jun 14, 2016 at 1:05 pm

      Not sure that’s true. There may be quite a bit of panic behind the scenes. Think insurance and pensions.

  6. OutLookingIn
    Jun 14, 2016 at 1:31 pm

    Deutsche Bank on the Ropes.

    Shares of DB are now trading below $15 for first time ever.
    Remember DB has offered 5% return on 90 day term deposits of 50K Euros or more, when the 10 year junk bond has a rate of 5.3% ! This smells of a drastic measure to offset a serious liquidity shortage.

    Deutsche Bank has one of the globes largest derivatives portfolio. With the added stress of the looming ‘Brexit’ vote, the underlying asset base of these derivatives may not be performing and will be in danger of collapse, if the UK votes in favor of exiting the EU. Thus taking with it the liquidity that is required to support the EU financial system.

    The sheer amount of complexity and connectivity built into the global derivative sector, virtually guarantees worldwide financial collapse if any portion of the underlying asset base in the sector defaults.

    • nhz
      Jun 14, 2016 at 1:49 pm

      it’s interesting that despite the unlimited speculative capital that Draghi is providing to the big speculators and the golden opportunities for frontrunning, the big banks are starting to hurt badly and rebel against the Draghi mob. Even if you assume that Deutsche and CS will be bailed out whatever happens, there will be a lot of fallout for some of the bankers and big speculators and a Brexit surprise could hasten the collapse of the EU banking system (is this the US plan?).

      Will be interesting to see who wins, the man from Goldman $ucks or the EU banking behemoths.

  7. NY Geezer
    Jun 14, 2016 at 1:55 pm

    Whether intended or not, “NIRP Absurdity” infers that this policy was adopted by Central Bankers in good faith for the benefit of the general public and that it has unexpectedly and inadvertently failed to work for the benefit of the public. But that is not correct.

    The Central Bankers clearly primarily represent the interests of the banks and the elite not the general public with whom those interests are in conflict.

    However, there is a general reluctance to admit this, so it is more palatable to say that the Central Bankers just made a mistake in managing the economy and that is the reason the banks and elite prosper while the general public suffers unimaginable hardship.

    But, the present outcome is not a mistake of policy. It is the result of deliberate and continuous planning over a period of years to bolster the interests of the banks and elite regardless of the cost to the public and the nation. Unfortunately, there does not appear to be an easy remedy for the public hardship.

  8. Jerry
    Jun 14, 2016 at 2:13 pm

    When the penny finally drops that western governments have no intension of honouring their bonds this will be the point of collapse. Investors will panic, the globe will freeze up. Historically governments always default with debt to GDP ratios of 90% or above. The whole of Europe defaulted back in 1932, I think we just have to wait for the big domino fall and the bankruptcies are piling up right now.

    Price tells you all you need to know and European banks have been in a downward trend for sometime now. ZIRP & NIRP are going to cause pension funds to blow up. We are heading into a global melt down which we can no longer escape.

    The level of monetary expansion that has taken place globally, causing assets to reflate after 2007/8 to save the bankers will now deflate, like it should have been allowed to take place in 07/08.

    Be safe

  9. Steve M
    Jun 14, 2016 at 3:43 pm

    “Alas, the Nikkei is still down ca.”

    I enjoy the style as much as the substance.

    It shows that you’ve been there and know what you’re talking about.

  10. Mary
    Jun 14, 2016 at 4:02 pm

    Wolf, I’d love to see a column devoted to the economics of Brexit. (If you’ve already published such a column, my apologies for not being aware.)

    Jun 14, 2016 at 4:12 pm

    There are 2 equally frightening causes/reasons for this:

    1) It is intentional and being planned by the “conspiracy” and thus must be something that leads to their One World Government.


    2) This is the way the world is, with everybody doing what they can, and imperfect humans have created a big house of cards.

    • Chip Javert
      Jun 14, 2016 at 8:24 pm

      Or Option (3): This is a bunch of European socialists just doing what socialists naturally do – ruin economic value and economic creation.

      The fact the the US is doing a good deal of it, too, is just sickening.

  12. VegasBob
    Jun 14, 2016 at 7:42 pm

    On a cheerier note, despite the ‘recovery’ in oil prices, year-over-year sales at certain Houston luxury goods retailers are off nearly 20%.

    My guess is that employees are really starting to worry about the prospect of upcoming layoffs, though I think there might be some noteworthy store closings coming down the pike as well.

    I got this info directly from the horse’s mouth, though the horse will not be named…

    • Jun 14, 2016 at 8:16 pm

      Thanks, VegasBob, for the info! Makes sense.

      I just got a report from a Houston CRE company, claiming that retail is hanging in there somehow … they’re profoundly worried about retail space. They see what’s happening, and they’re trying to soothe some rattled nerves.

  13. r cohn
    Jun 14, 2016 at 8:27 pm

    I understand buying bonds at negative rates in order to sell them at a higher price to someone else,but would anyone or institution ever buy long term bonds at negative rates in order to hold them to maturity.

    • Jun 14, 2016 at 11:52 pm

      But that’s what insurance companies and pensions funds are SUPPOSED to do. They’re supposed to ladder bonds to create predictable returns at the expected time needed. That’s their business model, which has now been shot.

  14. Petunia
    Jun 14, 2016 at 9:20 pm

    I think there are institutions that would hold negative rate bonds to maturity but they are institutions executing a wealth transfer as opposed to making a profit. Let’s say the govt/charity wanted to give away houses to low income people but wanted them to preform in return for equity, they could use a negative rate bond. The home owner could get -5% a year for 20 years and own the house. The govt/charity would retire the bond at maturity.

  15. chris Hauser
    Jun 15, 2016 at 11:40 am

    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.

    through the looking glass, dutch boy, hold until relieved.

    i’m a little puzzled where this will all end up, but i think it’ best to keep moving.

Comments are closed.