NIRP Absurdity Soars after Brexit, Hits $11.7 Trillion

No one knows how to back out without blowing up the whole system

The amount of government bonds that sport negative yields – an all-too-real absurdity where bondholders in effect are shanghaied into paying the government for the privilege of lending it money – has soared 12.5% after the Brexit vote, from $10.4 trillion at the end of May to $11.7 trillion as June 27, Fitch Ratings reported today.

The action was in longer-dated bonds, with maturities of 7 years and over. Those with negative yields soared to $2.635 trillion, up 62% from the end of May and up 93% from the end of April, having nearly doubled in two months!

The German 10-year yield fell below zero during the period, now at -0.124%. Japanese yields are below zero all the way out to 17 years. And “virtually all” of the Swiss sovereign debt luxuriates in negative yields.

The short end, with maturities of 1-year an under, didn’t see that much action, with negative yielding bonds rising less than 1% in May and 5% in June, to $3.232, trillion. And negative-yielding bonds with maturities between 1 and 7 years edged up 2.4% in June to $5.849 trillion.

The amount of German bonds with negative yields rose by 8% and French bonds by 13%, to over $1 trillion each. And yet an amazing thing happened – despite Draghi’s best efforts: Italian bonds lost some ground, and those with negative yields dropped by $200 billion since the end of May, likely a reflection of “investor risk aversion related to Italy leading up to and following the Brexit referendum.” Ah yes, Italy’s banking crisis that is now advancing to the next level.

The amount of Japanese Government Bonds with negative yields jumped by 18%, to $7.9 trillion (about half of the increase of the dollar-denominated amount stems from the yen’s 9% appreciation against the dollar during the period). JGBs account for about two-thirds of all negative yielding sovereign bonds.

This is how absurd the situation in Japan has gotten: the 30-year yield ranged today between 0.05% and 0.094%, as close to zero as you can get visually when rounding to one decimal, without actually hitting zero. On Monday, the yield dropped to 0.044%, or rounded to one decimal: 0.0%.

The 40-year yield has ranged today from 0.075% to 0.112%! For debt that matures in 40 years! Given the current monetary policies – the BOJ has loaded up its balance sheet with ¥426 trillion of securities, or a mind-blowing 85% of GDP, and has no way of stopping it without throwing Japan into a horrible debt crisis – well, given these policies, there is practically no chance that the yen in its current form will not have blown up by then.

But investors don’t care.

Let me correct that: investors aren’t buying the JGBs anyway. The only entity that is buying on a net basis is the BOJ. Everyone else is selling. And when these investors slow down their selling just one notch, even as the BOJ continues mopping up every JGB that isn’t nailed down, yields fall further.

What does this mean for investors that bought bonds with long maturities years ago? For example the German 4.75% Bund, issued in 2008 and due in July 2040 trades at 202.3 cents on the euro, having doubled its value over the past eight years. The sellers of those bonds are the true beneficiaries of Draghi’s monetary policies, and they can sell them right to the ECB.

But long-term investors, like insurance companies and pension funds, hold bonds to maturity to create predictable income streams to pay for predictable benefits decades down the road. They’re going to get face value for these bonds when they’re redeemed. And 30-year bonds that these insurance companies and pension funds are now buying have a yield of 0.32%. Next to nothing!

They’re completely screwed. Or rather, the regular folks who are supposed to get these payouts in the future are completely screwed. Fitch put it this way:

The increasing amount of long-term negative-yielding debt underscores the challenges faced by large bond investors such as insurance companies that need to match long-term liabilities with similar maturity assets. As more of the global universe of safe assets drops into negative-yielding territory, income for these investors continues to fall.

No one has any idea how to get out of it. Right now, everyone is still just focused on getting ever deeper into it. Because that’s where the short-term profit is: even more negative yields!

Where does that leave our Federal Flip-Flop Reserve that has been jabbering about raising rates since 2014 and has managed to raise them only once, by one tiny increment, six months ago – now that it has admitted that central bank actions around the globe are connected and cross-contaminate their respective bailiwicks.

At the beginning of the year, the Fed expected four rate hikes this year. At the beginning of June, it was down to two. And now?

“The Fed Funds futures are putting a 0% chance of a hike in the next four months and just a 8.6% chance of a hike in December,” explained Christine Hughes, Chief Investment Strategist at OtterWood Capital. “Interestingly, traders now see a 13.8% chance of a cut in September or November before any hikes.”

It seems everything that happens in this world – Brexit is just another event in a long list of such events – pumps up the prices of government bonds and pushes down their yields, as frazzled central bankers resort to lowering rates even further and buying even more bonds, to counteract the very forces that their harebrained, scorched-earth policies have unleashed, and as investors no longer know where to turn to, in a landscape where nearly all assets are ludicrously overpriced and infested with risks. And no one knows how to back out of it without blowing up the whole system.

But there are some consequences for the real economy. Business optimism in the US is already “lowest since the height of the Financial Crisis.” Read… How Vulnerable is the Shaky US Economy to Brexit Fallout and European Bank Meltdown?

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  49 comments for “NIRP Absurdity Soars after Brexit, Hits $11.7 Trillion

  1. Julio Bigtime says:

    Amen… but for heaven’s sake be sure to steer well clear of pet rocks!

  2. Lemmings going over the cliff…

  3. Spencer says:

    Are these people brain dead or what? Useless zombies buying this shit, yes shit. Look at me, I’m in the safety of bonds. LOL or what? This sucker is gonna blow, and hard. There will be plenty of pain, and I cannot wait to see it inflicted hard. Useless brain dead buggers reacting to a dead market!
    It’s Miller time for me! My “Golden Year’s are ahead”, yellow hard cash!

    • Mark says:

      Stick with yellow liquid Miller instead, for time being.

    • Marty says:

      There are institutions that are required to buy bonds whether they want to or not. Wolf mentioned insurance companies. Also, now money market funds and I think whoever is doing repos. (That’s a black box I can’t figure out.) And of course, regulations are coming to a 401k/IRA near you.

      • Petunia says:

        Govt bonds are considered cash equivalents and are the best collateral in the financial world. They are the standard collateral for a repo.

  4. Spencer says:

    Oh, and then this

    Fraudulent bastards, free money, helicopter money, for shareholders. I just puked my Miller!

  5. EVENT HORIZON says:

    A couple of comments:

    Negative interest rates only seem to apply to, mostly, Government(s) issued bonds. You give them $1 Million and each year they take a few thousand dollars. OK. I get it.

    BUT, why are people or institutions doing this? Simple. You actually own a bond with a fixed principal that, assuming nothing else, you will get back at the end of the bond’s life. Now, compare that to putting your money into a bank, any bank, or any corporate bond.

    With this “bail in” concept, you can lose all of it. All. With corporations going under and with the fear of a coming economic, social, demographic, and religious collapses, no company is strong enough to withstand that. Not even Wal-mart. Next down-turn will take out GM and make their bonds worthless.

    In time, US bonds will also be negative. There is nothing in the works to stop it. 99% of those here know things can not get better since nothing is being done to make it get better. It can only get worse and those individuals, groups, investment groups, and companies with any cash are going to hire the best looking ugly-whore in the Banking Whore House…The US Bond Market.

    So, what does that do for us? Nothing. Now, maybe home mortgages will go down, but never to negative. So, refinance. Car loans will be low, but you can FORGET about any of your credit cards being at 1 or 2% even though THAT would really help the average man, but to hell with the average man.

    • John Doyle says:

      Obviously the Government is trying to stop investors storing money as bonds with the fed. Money stored with the Fed is not going into business in the economy.
      Compared to investing in commercial bank bonds, the Fed is secure, government guaranteed. So, it’s a small cost to protect their money. Businesses aren’t seeing too many worthwhile deals to make and as long as that perception lasts they will leave their money there. Even Ben Bernanke complained he was unable to get a mortgage.

    • Agnes says:

      During the Lehman crisis two of my co-workers had their credit card interest rates jacked up for no reason at all. So they paid off the balance in cash. The credit card companies, were, of course, horrified. It won’t prevent them from trying again, given a good excuse.

      • night-train says:

        Agnes: After the crash, I had two credit cards which I held since the mid-80s. I hadn’t carried balances for years. Over the years the credit limits on both cards had risen to absurd levels without me ever asking for an increase. Then, abruptly, the halved the credit limits which I had never requested in the first place. Have you ever read Joseph Heller’s “Catch 22”? That is how befuddled I felt.

    • nhz says:

      home mortgages do go down, in the Netherlands official rates are already below 1% and a very small percentage of mortgages are trading at negative rates just like in several Scandinavian countries. In Spain many people have been paying extremely low monthly rates for new homes they would NEVER be able to afford in normal financial conditions.

      What happens is that homeprices skyrocket, everybody who can fog a mirror qualifies for buying a home, monthly costs for homeowners are extremely low (like 2-4x lower than renting the same home) – all of which is great for homeowners if you assume this game will continue forever. Because as soon as this stops, all homeowners will be deep under water (nobody pays off the mortgage over here, or only a small percentage – the plan is to pay off the mortgage in 30 or 40 years with the pocket change that you get at the grocery store).
      Car loans? Cars are completely free again for those who qualify, no payments for the first few years and after that we need some debt forgiveness because after all, everyone in Europe is entitled to their own brand new Porsche, Mercedes etc. A large chunk of the population is having a blast, just don’t wonder how all this is possible and cheer for the clever ECB policies.

      To hell with the average man? Not at all, a lot of ‘average people’ – especially the less responsible, don’t worry be happy types, are having a great time financially. When the game of musical chairs stops they count on politics to bail them out. Like people say over here: ‘When the sky falls everyone will have a blue hat’.

      The only ones who are really punished are the financially responsible citizens, the savers and people who rent (at their own cost, I’m not including those in subsidized social housing) instead of buying, those who depend on private pensions to survive.

  6. EVENT HORIZON says:

    Another clear meaning of negative % is this: “We, the banks and your government don’t need nor want you paper. We can issue our own. Why should we pay you anything for paper notes we can, and do, print for free? Huh, sucker?”

    Want proof? Yesterday we read where the ECB loaned out 399 BILLION Euros? Something like that. And, there are readers who call this “money”. Well, ok, let’s play along. IF this was money, from whom did the ECB get the 399 Billion (money) so they could loan it out? Are there than many depositors who have put 399 Billion into the ECB, or any bank, where they can now lend it out? Really? Where did the ECB get the “money”……they typed 399 Billion Euros on their key board like I just did. I would be arrested. They are called our leaders. Suckers.

    You see, GOLD, prevents this. If the ECB, or anybody, wanted to loan out 399″X” in GOLD, they have to have or get the GOLD. Somebody loans the bank “useless” metal, that the bank can not print, and then someday has to give that “useless, barbaric” metal BACK to the depositors. GOLD shackles greedy silent men from the most fantastic theft ever.

    • nhz says:

      Of course the ECB can loan out 399 “X” GOLD, just not in physical form. It’s not much different from what they are doing with their euro money. When people buy paper gold they count on their ‘investment’ keeping its value with the price of gold, which works until it doesn’t. The same applies for the euro money the ECB reates out of thin air: this system will implode sooner or later, and by that time people will find the money in their account isn’t worth anything, thanks to the ECB.

      And of course, the US is at best a notch above the EU con game.

  7. Lori says:

    The Great Depression 2.0 !!!

  8. Ehawk says:

    So much for all the Doom and sky is falling. Markets are back up.. yep. You can read and analyze charts all you want…. QE4 coming up shortly so markets will soar… who cares abour NIRP or buybacks… it’s all up up up

  9. Petunia says:

    The majority of investors in the bond markets are pension funds. They must buy and stay invested. It doesn’t take much to see that NIRP is being used to liquidate these pension funds. Another strategy to impoverish the working class.

    • VegasBob says:

      Of course.

      Zero interest rates benefit only those who are already wealthy, just as money-printing benefits only those who are already wealthy.

      At 8% interest, it only takes $500K of principal to generate $40K a year of interest income.

      At 0.1% interest (one tenth of one percent), it takes $40 MILLION of principal to generate that same $40K of interest income.

      It ought to be obvious that central banks are literally DESTROYING the retirement prospects of hundreds of millions or even billions of people worldwide.

      Central banking has become like a heat-seeking missile on a search and destroy mission. And we’re the folks who are getting destroyed…

      • nhz says:

        wrong, it isn’t just the 1% that are profiting; and that is why this game will continue for much longer. Among the ‘average’ citizens quite a few are profiting hugely while others are severely punished.

        People with huge debts (like a mortgage) also profit strongly from the current central bank policies, at least for the moment. And you could also say that many government workers, those on social security etc. are profiting, because the almost zero rates for government debt mean that they can be far more generous than if the debt was trading at the historically normal 5-10% rates.

    • BoyfromTottenham says:

      A good point Petunia. How will this pan out, given that the Baby Boomers are now reaching retirement age in droves? And if the actuaries say that the funds cannot pay the promised pensions, who will / can hold these pension funds to account?

      • Petunia says:

        I think the strategy will be to only allow people to retire up to a certain date, guarantee them benefits, and move younger people to another scheme. If you are more than 5 or 10 years away from retirement I would worry.

        • VegasBob says:

          You’re right. Even if they raise Social Security taxes they won’t collect enough to pay the promised benefits.

          And with 70-odd million Boomers on Medicare by 2029, that’ll go bankrupt fairly quickly too.

          I think I’m going to claim Social Security immediately if Hitlery gets in, even though I’ll only be 64. I figure I should get it while the getting is good.

        • Wolf Richter says:

          Your nickname for Hillary Clinton is over the limit for WS. I missed it earlier. All comments with that name will be deleted or blocked.

        • d says:

          Yes and Trump is far closer to such than her any day.

        • Ptb says:

          Means testing. That’s my bet for the first round of dealing with the problem. Figures indicate that about 30% of retirees are financially set. So get them off the system and you can kick the can for a while longer.
          Of course the real big gorilla is Medicare as every retirement scheme kicks people onto it at 65. It will be the one with serious recalibration.

    • polecat says:

      I think that that’s about the time the ants turn on the grasshoppers!

  10. NotSoSure says:

    But there’s no need to back out.

    What about if Central Bank of all countries engage in coordinated write down of all debts through NIRP. Is it absurd? Yes. Is it criminal? No. Will it benefit the 1%? Some. How about the banks? Well, you can always engage in other back door bailouts. At the end of the day, as long as you can placate the 1% and provide the Muppets with enough Game of Thrones episode, everything will be fine.

    • Wolf Richter says:

      This is already happening in Japan. The other option is a brutal debt crisis, and they’re not going for that program. It will have (ugly) consequences, but it won’t be a debt crisis.

  11. Richard Hill says:

    No-one makes the connection to demographics. What use is a 40 year Japanese bond if Japan continues its demographic slide?. The same applies to most wealthy countries. Germany is trying to fix its shortage of young workers by importing young people. Will it work? Who will be there to pay back the long bonds? Will they want to? We are like frogs in the warming pan. It would be good to jump out, but where to?

    • MC says:

      People like Pat Buchanan have been preaching what I call the “Reverse Malthusian” for decades now. Let me get a few things straight.

      If Germany has such desperate need for manpower, why is she not getting it from Spain? Spain has 25% unemployment raising to 45% among people 30 or younger. Italy and Portugal are not much better.

      I’ve been hearing this mumbo-jumbo of “we need young workers from the Third World” for the past two decades now.
      Back in the days it was the steel mills around here. They were dropping like flies due to both competition from abroad and the owners’ failure to invest in new technologies. Hence they had this brilliant idea to cut costs like ailing firms always do: by replacing unionized locals with non-union (read: cheaper) workers, chiefly from Senegal.
      Did it work? No. The steel mills closed nonetheless taking both union and non-union jobs with them. When I’ll be able to move again (if ever) I’ll go and take some pictures of the empty hulks.

      But it set in motion a perverse mechanism by which industrialists, under the excuse of “needing young workers”, import labor to drive wages down. In countries with naturally low wages and high unemployment, such as Spain, the impact of this Third World immigration has been absolutely devastating. No, immigrants aren’t “stealing jobs” but make finding them even harder and drive wages down, a big problem given life in so called Club Med countries is nowhere near as cheap as it used to.

      But there’s an even bigger problem: the robotic hosts leaving FANUC, Hitachi, Yaskawa and Nachi-Fujikoshi factories every day.
      Marshall Petain had a favorite saying, which was later picked by Eisenhower: “You cannot fight with men against material”.
      Industrial robots are becoming more capable and cheaper every day. They don’t unionize, they don’t strike, they don’t demand higher wages, they do not get hurt or ill, they work every minute of the week unless you turn them off, they always deliver the same consistent quality.
      Even China, still with an enormous untapped reserve of labor, has understood the importance of industrial robots.

      So far robots have make themselves felt only in some sectors of manufacturing but they are applying for a job near you: Komatsu has started selling the first autonomous dozers, Daimler has self-driving lorries in the pipeline and CNH has some unpleasant surprises in store if you are a farm laborer of which you may see a glympse in the vineyards of the Rhone Valley.

      In short if German industrialists believe they will beat Japan’s and South Korea’s robotic hosts by importing cheap labor… good luck to them.

      • VegasBob says:

        Most of Europe has a demographic problem, like Japan. The native population is aging rapidly, and there won’t be enough tax money to pay the promised benefits. So the politicians hope against hope that they can fix their demographic problem with immigrants.

        Of course, the politicians don’t bother to tell the public that most of these ‘imported’ cheap workers have no job skills, and few if any of them have any interest in assimilating into the population of their host country.

        Moreover, when faced with a choice between a low-paying job that requires work or generous social welfare benefits, virtually all of them choose the welfare benefits.

        It’s not a recipe for success…

      • Jonathan says:

        I did a rough estimate of the impact of the China’s one-child policy from 1978 to 2016 and the cumulative number of “lost” people not born on this world was around 51 million. At 2016 China’s GDP/capita of $8200, that’s 3.8% of their GDP lost in 2016.

        That’s not even touching the global demographics yet, where birth rates are plummeting while post WW2 boomer generation starts kicking the bucket en masse in like 20 years.

        I actually think it’s a plus to have less people on this planet, but i’m sure the current economic system demanding perpetual growth as a normal wouldn’t.

      • night-train says:

        Spot on about automation. People think we no longer make steel in the US. We do. But the plants only require 100-150 workers, where they once employed 2,500. My state has bet big on auto manufacturing. I wonder how many human workers will be needed after the next generation of robot workers.

        Instead of planning trade wars and the lot, we had better start working on what kind of society we want with 25-50% baked in unemployment. There is no going back to some idealized better time. There is only the future and we had better make good, rational decisions based on verifiable information; not emotion.

        • MC says:

          Mercifully automation will fully come of age after I am long gone so I won’t have to worry about the consequences. ;-)

      • prepalaw says:

        Very well stated.

        Parking transients in Germany has everything to do with politics and nothing to do with demographics.

        Many robots are automation systems without mechanical form. We use them more and more in our daily lives to sift through data and find stuff. Voice to text and the reverse have made secretaries obsolete.

        The problem is that robots do not visit restaurants. They may operate vehicles but will not consume gasoline for lifestyle purposes. Their owners may borrow money to buy a robot. But the robot does not consume a mortgage or use a credit card.

        Seriously, the EU is now “studying” the possibility of assessing something like a personal income tax on a robot. That is how absurd everything has become.

  12. Bobo says:

    “Monetary policy means just what I want it to mean, neither more nor less” exclaimed Humpty Monetary Dumpty. And so Humpty Monetary Dumpty sat on his monetary wall until one day he got so high on NIRP bonds that he was occasioned to fall from a great height. It came to pass that all the Central Bank’s horses and all the Central Bank’s men couldn’t put Humpty together again.

  13. Mark Stevens says:

    Could the negative rates be protection money offered up the the European governments to keep the billionaire class’s wealth safe? It seems there is no lack of buyers of these bonds nor any pushback or complaints except in the MSM.

  14. r cohn says:

    I have a question
    Can you currently buy a 30 year BUND denominted in Deutschmarks and issued before 2002 with Euros

  15. ML says:

    The fault is not the low interest rates or negative yields. The fault is the existence of pension funds, etc. it is time for the spotlight to fall on their uselessness to society. Gathering up the savings of millions of people in exchange for promises that likely cannot be met is not the the fault of interest rates.

    • night-train says:

      So what do you suggest instead?

    • Petunia says:

      Pension funds are not useless. They are created and funded to pay the obligations they insure. The problem is that employers and bankers see a pool of money and cannot contain their greed.

      When I worked on Wall St. in the early 90’s, I was surprised to hear them speak openly of the 401K and IRA’s as pools of money created to be confiscated or taxed, as the need arose. The disconnect between what they were really doing and what they were selling was striking. It was/is a deliberate fraud perpetuated on working people by all the institutions they believe will protect them. It really is an us versus them world.

  16. Ptb says:

    Yup, population is the real problem going forward. More people than ever and less use for them than ever….bad combo!
    Society will need some major reorganization in order to handle what’s coming. People don’t handle change very we’ll. And this ones a doozy. It’s a reverse Malthus.

  17. chris Hauser says:

    the midas plague. look it up.

    i have to stick with the micro, the macro’s too big for me.

  18. andy pyle says:

    Negative Interest Rate Bonds would be a great way for Puerto Rico to get rid of it’s debt. And Greece, and various Third World countries, and……

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