Race To The Bottom As Japan Considers Deeper Negative Rates After ECB Cut. US To Follow (#GotBitcoin?)
The Bank of Japan is starting to think about easing options in more detail. Race To The Bottom As Japan Considers Deeper Negative Rates After ECB Cut. US To Follow (#GotBitcoin?)
The Bank of Japan is growing more open to the idea of cutting short-term interest rates deeper into negative territory, responding to global risks that are forcing other central banks to cut rates, said people familiar with the bank’s thinking.
If the bank were to do so, however, it would look for ways to avoid sharp declines at the longer end of the yield curve, the people said. The goal is to keep an upward slope from low short-term rates to higher long-term rates, which makes it easier for life insurers and pension funds to make investment returns.
Amid concerns about a global slowdown and trade tensions, the European Central Bank on Thursday cut its rate target to minus 0.5% and reintroduced a program to buy eurozone debt. The Federal Reserve at its meeting Sept. 18 is poised to cut its key policy rate, currently set at a range between 2% and 2.25%. Investors widely expect a cut of a quarter-percentage point, but President Trump in a recent tweet called for cutting rates to zero or lower.
“It is good timing for the BOJ to start thinking about easing options in more detail,” said one person with knowledge of the central bank’s strategy.
Any changes may not happen right away. The Bank of Japan’s policy board is leaning toward keeping policy steady at its own meeting next Wednesday and Thursday because the domestic economy looks relatively solid and the markets are stable, said the people familiar with the bank’s thinking.
The central bank also wants to see the impact of a sales tax increase, which will be introduced Oct. 1, and the results of its quarterly corporate sentiment survey, released the same day. The policy board meets again in late October.
Gov. Haruhiko Kuroda has said the bank has four easing options: cutting its short-term rate, currently minus 0.1%; lowering the target for the 10-year government bond yield, currently zero; expanding purchases of assets such as stocks; and, expanding the monetary base faster. At its previous meeting in July, the Bank of Japan added a line to its statement saying it wouldn’t hesitate to take additional easing measures if needed.
Mr. Kuroda has repeatedly said he is aware of the side effects of the negative-interest-rate policy he first announced in January 2016. That is a nod to criticism from banks, insurance companies and others. But if the global downturn gets worse, the Bank of Japan might have to reconsider its deference to banks.
“Conditions are different now compared with a year or two ago when the global economy looked fine,” said one of the people familiar with the bank’s thinking. “When the economy looks like it is tanking, a central bank should not prioritize banks’ profits over the overall economy.”
If the yield curve slopes upward—meaning yields on bonds get gradually higher as the term of the bonds gets longer—that is good for banks, which generally take in shorter-term deposits and lend out the money for longer terms such as a 30-year home mortgage. The central bank wants to preserve that kind of yield curve.
To get a more upward-sloping yield curve, it needs to look closely at lowering short-term interest rates while keeping long-term yields roughly where they are now, said some of the people familiar with the bank’s thinking.
Mr. Kuroda voiced caution about declines in longer-term yields in an interview this month with the Nikkei business daily. His comments helped lift the 10-year Japanese government bond yield to minus 0.16% Friday from minus 0.295% earlier this month, which was the lowest since July 2016 and near its record low.
Mitsubishi UFJ Morgan Stanley Securities senior market economist Naomi Muguruma said the bank could reduce purchases of superlong Japanese government bonds—a move that doesn’t necessarily require a decision by the policy board. The bank has already reduced overall JGB purchases significantly, buying only ¥24 trillion ($222 billion) in the most recent 12-month period, compared with its ¥80 trillion guidance for annual purchases.
Treasury Yields Rise, Erasing Much of August Decline
PG&E bonds rally on settlement with insurance claimants.
The whiplash seizing the Treasury market continued Friday as U.S. government bond prices headed for a fifth consecutive session of declines after the Commerce Department said that retail sales rose 0.4% last month.
The better-than-expected economic news pushed yields on the 10-year bond as high as 1.869%, according to Tradeweb, up from 1.789% Thursday and 1.466% at the start of the month.
Traders said they’re selling Treasurys based on optimism about U.S. economic growth and a thaw in U.S. trade talks with China. But the velocity of recent price moves highlights how fickle market sentiment has become because of uncertainty in domestic politics, international trade and the state of the global economy. Bond yields rise when prices fall.
Investors are also repositioning ahead of the Federal Reserve Board meeting next week, said Maryann Hurley, a bond trader at D.A. Davidson & Co.
“I’m not expecting an overly dovish statement to come out on Wednesday,” she said.
Bond yields dropped in August, after concerns slowing economic growth—and about President Trump’s demands for steep rate cuts—raised the possibility that the Fed might cut rates by as much as half a percentage point this month. The consensus now holds that a quarter-point reduction is most likely.
Sharp as the rise in Treasury yields has been in September, it looks ho-hum compared with the half-percentage-point drop in 10-year yields that took place in the first two weeks of August. The severity of the moves in both directions implies that investors are trading more on momentum than on fundamental economic forecasts and can easily be swayed to change their minds, some analysts said.
“Given how fast we went down in yield, some of the weaker longs are getting shaken out now,” Ms. Hurley said
Falling Treasury prices dragged down most corporate bonds in lockstep, but debt of bankrupt California electric utility PG&E Corp. rose on the announcement of an agreement between the company and one of its largest creditor groups. PG&E’s 6.05% bond due 2034 traded at 110.13 cents on the dollar Friday, up from around 108 before the deal was disclosed, according to data from MarketAxess.
Creditors with $20 billion of wildfire insurance-related claims against the company reached a proposed $11 billion settlement in the hopes that it would speed the conclusion of the bankruptcy case, according to a statement by a group representing the insurers.
The WSJ Dollar Index, which measures the U.S. currency against a basket of 16 others, rebounded slightly Friday to 91.07 from an earlier low of 90.99, after the retail sales figure came out above the 0.2% predicted by economists in a Wall Street Journal survey. The index finished Thursday at 91.26.
Falling Yields Unleash Flood of Muni ‘Century Bonds’
Universities, state and local governments rush to lock in ultralow rates for decades.
U.S. state and local governments, along with universities, are joining companies in a dash to issue debt and lock in low rates, sometimes for up to 100 years.
Rutgers University funded various capital projects by selling roughly $300 million in debt this week that doesn’t mature for a century. The New Jersey-based school adds to a list that includes the University of Virginia and University of Pennsylvania, which have also sold so-called century bonds in recent weeks.
“The market presented UVA with a historic opportunity,” said Jennifer Wagner Davis, the school’s executive vice president and chief operating officer.
Along with UVA, borrowers including Apple Inc., Deere & Co. and Walt Disney Co. have recently sought to secure historically low rates. The sales are occurring as fears of a global economic slowdown have driven bond yields around the world to near-record lows and made it cheaper for states, local governments and higher-education institutions to borrow.
Adding to the urgency for issuers: The lows in bond yields may already have passed. The yield on the 10-year U.S. Treasury note, for example, has jumped by around a quarter percentage point in recent days.
Still, there is more than $15 trillion of negative-yielding debt around the world.
Treasury Secretary Steven Mnuchin said Thursday that the U.S. was “very seriously considering” issuing a 50-year Treasury bond, and analysts and investors have wondered why more governments aren’t taking advantage of low rates to issue bonds that mature in 100 years.
Meanwhile, more money has flown into municipal-bond funds this year through August than since at least 1992, according to data from Refinitiv.
“With Treasury yields falling so low, the world-wide demand for municipals is just unbelievable,” said Jeff Burger, a portfolio manager at Mellon Investments Corp.
As a result, municipalities are jumping to meet the demand for their bonds, which investors often prize for their stable income and typically tax-exempt interest payments. Tax-exempt muni-bond issuance has risen 5% year-to-date from the same time last year, according to the latest available data from the Securities Industry and Financial Markets Association, while taxable municipal-bond issuance has jumped 34%.
Universities are getting into the act too. The recent sales put issuance of municipal century bonds on track to hit the highest level in five years. Total century-bond issuance this year is headed toward about $1.3 billion through early September, according to estimates from research firm Municipal Market Analytics. All century-bond issuers this year have been universities, according to MMA. That is a rebound after issuers sold no century bonds last year, and slated to be the most since 2014’s $1.6 billion.
“Our borrowing costs beat our expectations,” said MaryFrances McCourt, the University of Pennsylvania’s vice president of finance and treasurer, adding that the all-in interest costs on the century bond were about half a percentage point lower than the university anticipated. “We were thrilled.”
Similarly, UVA moved up the timing of its century bond offering by approximately two months in anticipation of heavy demand from investors, issuing $350 million in taxable debt to pay for academic facilities such as a chemistry lab, a student wellness center and dormitories, Ms. Wagner Davis said.
The university landed the lowest interest rates for a higher education institution’s century bond on record as of last week, with interest costs of about 3.3%, she said. That is almost a percentage point lower than its borrowing costs when it issued a century bond in 2017.
Falling bond yields have spurred unusual movements in the municipal market, some of which have mimicked the Treasury market. For example, shorter-term bond yields hovered higher than longer-term municipal bond yields for the first time in August, according to Daniel Berger, a senior market strategist at Refinitiv’s Municipal Market Data.
Some municipalities are taking advantage of lower rates in other ways. The 2017 tax overhaul limited the ability of state and local governments to sell tax-free debt to refinance old bonds through so-called advanced refundings. But borrowers are swapping out tax-exempt debt for taxable debt and still saving money.
Traditionally, yields on tax-exempt debt are lower than those on taxable bonds. But rates are so low that borrowers are able to issue taxable debt and still save money, analysts said.
“It’s a strange moment that makes this available but it makes perfect economic sense,” said Michael Zezas, a strategist at Morgan Stanley .
Miami-Dade County, Fla., sold almost $400 million in bonds in August for Miami International Airport. Swapping old debt for taxable debt saved money, said Sergio San Miguel, Miami-Dade Aviation Department’s chief financial officer through a spokesman. As a result, the county can borrow more to make improvements to the airport.
Bankers and analysts said they are expecting issuance to remain strong in coming months. Jim Costello, a managing director at JPMorgan Chase & Co. said more universities are looking at century bond issuances and advanced refundings.
“Most universities are considering their financing options in the bond market given the low interest rate environment,” said Mr. Costello.
But some investors are wondering how low yields on municipal debt can fall before the bonds lose their luster. The yield on the Bloomberg Barclays Municipal Bond Index recently declined to its lowest level since 2016, FactSet data show. The yield on the Bloomberg Barclays Municipal Bond High Yield Index hit a record low in August.
“The flows going into munis are getting extremely strong,” said George Rusnak, co-head of fixed-income strategy at the Wells Fargo Investment Institute. “If it continues down this path, we could see bumpy times ahead.”
ECB Launches Major Stimulus Package, Cuts Key Rate
Move was aimed at insulating the eurozone’s wobbling economy from a global slowdown and trade tensions.
The European Central Bank cut its key interest rate and launched a sweeping package of bond purchases Thursday that lays the ground work for a long period of ultraloose monetary policy, jolting European financial markets and triggering an immediate response from President Trump.
The ECB’s preemptive move was aimed at insulating the eurozone’s wobbling economy from a global slowdown and trade tensions. It is the ECB’s largest dose of monetary stimulus in 3½ years and a bold finale for departing President Mario Draghi, who looks to be committing his successor to negative interest rates and an open-ended bond-buying program, possibly for years.
But the move triggered opposition from a handful of ECB officials, according to people familiar with the matter, while leaving key practical questions unanswered. Primarily: How long can the ECB keep purchasing bonds without significantly enlarging the pool of assets it can buy? Some analysts estimated it might be less than a year.
Investors initially cheered the surprise move as they anticipated the return to bond markets of an 800-pound gorilla, sending the euro down against the dollar and bidding up the prices of eurozone government debt. But those gains later reversed as Mr. Draghi highlighted divisions within the ECB’s rate-setting committee over its future course.
In a tweet, Mr. Trump said the ECB was “trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.” The president has repeatedly criticized the Federal Reserve for being less aggressive than the ECB.
The ECB joins central banks around the world, including the Fed, that have been cutting interest rates in recent weeks amid a bitter trade dispute between the U.S. and China, a fall in trade volumes and a slowdown in global growth. Second-quarter figures released Thursday by the Organization for Economic Cooperation and Development showed year-to-year economic growth in the Group of 20 leading economies was at its weakest since the start of 2013.
The Fed is expected to cut its key interest rate by a quarter percentage point next week, following a similar cut in July, its first since 2008. The ECB’s move ramps up pressure on the Fed to follow suit.
The ECB said it would cut its key interest rate by 0.1 percentage point, to minus 0.5%, and buy €20 billion ($22 billion) a month of eurozone debt starting in November, relaunching a so-called quantitative easing program that it only phased out in December.
The new QE program is expected to “run for as long as necessary,” and only to end shortly before the bank starts raising interest rates, the ECB said. The ECB also promised not to raise interest rates “until it has seen the inflation outlook robustly converge” with its target of just below 2%. Thursday’s cut was the ECB’s first since March 2016.
“Mario Draghi delivered a more aggressive easing package than most observers expected, and one of the best outcomes possible in the current political context,” said Frederik Ducrozet, an economist with Pictet Wealth Management in Geneva.
Mr. Draghi said at a news conference that the ECB was reacting to a longer-than-expected slowdown in the eurozone and persistently weak inflation. “We still think that the probability of a recession in the euro area is small, but it has gone up,” Mr. Draghi said.
The eurozone economy’s growth has slowed to less than 1%, half the pace of the U.S. Europe has been hit hard by international tensions around trade because of its reliance on exports, with Germany—the region’s economic powerhouse—particularly vulnerable. The bloc also faces the possibility of a disorderly exit from the European Union by the U.K., a prospect that could seriously disrupt business and finance.
Crucially, ECB officials were divided over the decision to revive QE. That stimulus program is particularly contentious in parts of northern Europe due to concerns that it subsidizes spendthrift governments in the south of the region.
Reflecting those divisions, officials decided not to significantly enlarge the pool of assets the bank can buy—though it did expand the kinds of corporate and mortgage bonds it can purchase. Without changing rules that prohibit the bank from buying more than a third of any government’s debt, Mr. Ducrozet estimates that the ECB can only continue its bond purchases for 9-12 months.
At least five officials on the ECB’s 25-member rate-setting committee opposed the decision to restart QE, including the governors of the Dutch, French and German central banks, according to people familiar with the matter. Two members of the ECB’s executive board— Sabine Lautenschlaeger and Benoit Coeure —also opposed the move, the people said.
Mr. Draghi said, “There was no appetite to discuss limits, because we have the headroom to go on for quite some time without raising the discussion about limits.”
The ECB’s policies also are politically sensitive on the other side of the Atlantic. Mr. Trump criticized Mr. Draghi on Twitter in June for signaling that fresh ECB stimulus was coming.
“The Fed sits, and sits, and sits,” Mr. Trump tweeted on Thursday, responding to the ECB’s move. “They get paid to borrow money, while we are paying interest!”
Asked about Mr. Trump’s latest tweet, Mr. Draghi said the ECB doesn’t aim to influence the euro exchange rate. “We have a mandate. We pursue price stability and we don’t target exchange rates. Period,” he said.
Some have questioned whether the fresh shot of stimulus will succeed in protecting the eurozone economy from an international trade war that shows little sign of abating. With borrowing rates in the eurozone already exceedingly low, the economy won’t benefit much from the latest moves, say Mr. Draghi’s critics.
“I don’t think that this additional decrease in the ECB rate will have any positive impact on economic activity,” said Nuno Fernandes, Professor of Financial Management at IESE Business School in Madrid. “In my view, Europe risks having the fate of Japan,” whose economy stagnated in recent decades despite very loose monetary policy from the Bank of Japan .
By launching such a bold stimulus package, Mr. Draghi has left the central bank with very little ammunition to fight any new downturn, while aggravating possible side effects that include asset-price bubbles and weakened banks. Mr. Draghi said the ECB was closely monitoring those side effects, and called urgently on eurozone governments to step up spending to support growth.
Unlike the Fed, the ECB never raised interest rates or trimmed its bondholdings during the economic recovery.
The package also binds the hands of Mr. Draghi’s successor, former International Monetary Fund Managing Director Christine Lagarde, who will take office on Nov. 1.
With interest rates falling further below zero, the ECB also moved Thursday to provide relief for the region’s embattled banks, whose profits have been hurt by negative interest rates. The ECB will create a mechanism to shield banks from the full force of negative rates, and sweeten the terms of a fresh batch of long-term loans.
Still, German banks criticized the ECB’s move. “The ECB recalls a motorist who continues to increase speed in a dead end,” said Hans-Walter Peters, President of the Association of German Banks. Race To The Bottom,Race To The Bottom,Race To The Bottom,Race To The Bottom,Race To The Bottom,Race To The Bottom,Race To The Bottom,Race To The Bottom,,Race To The Bottom,Race To The Bottom,Race To The Bottom,Race To The Bottom,Race To The Bottom,Race To The Bottom,Race To The Bottom,Race To The Bottom,Race To The Bottom,Race To The Bottom,