ECB to Keep Negative Rates for "At Least" Another Year: Treasuries Rally

The ECB will end its asset purchase program in Dec. but will keep negative rates "at least through the summer of 2019".

The ECB is in a tight spot with the Fed hiking and tapering. The ECB would like to hike, but data in the Eurozone, especially Germany has been weak. And before it will hik it at least needs to end its asset purchasing program.

Today the ECB played it half way. It announced an end to asset buying in December but it simultaneously pledged to hold rates low for longer than the market expected.

As a result, the Euro slid 1%, On Track for Steepest Slump Since October.

ECB to End Bond-Buying Program in December

The European Central Bank is closing a chapter on one controversial policy, government bond purchases, while extending the life of another: negative interest rates.

The central bank Thursday laid out plans to wind down its giant bond-buying program by the end of this year, but said it likely would wait “at least through the summer of 2019” before raising its deposit rate, now at minus 0.4%.

The ECB “has done everything it can to prevent investors from pricing in rising interest rates,” said Joerg Kraemer, chief economist at Commerzbank in Frankfurt. “There is no sign of a real rate hike cycle.”

Critics argue the ECB’s purchases coincided with steep increases in the prices of property and other assets and made it easier for unviable “zombie” firms to stay alive. Some countries, notably Greece and Italy, still have large volumes of nonperforming loans.>

Negative interest rates tend to hurt savers and banks, but Mr. Draghi argued Thursday that savers could invest in other assets while profits at bank and insurance companies hadn’t been hurt.

ECB vs Fed

ECB Asset Purchases

Negative Interest Rates Hurt Banks

Negative interest rates clobber savers and hurt the banks. The US recapitalized banks by giving them free money.

Bubbles Galore

The Fed and the ECB's policy have two things in common.

  • Both sets of actions blew bubbles.
  • Both sets of actions created zombie corporations.

Today's Interesting Treasury Reaction

Today's excellent retail sales report in the US should have sent US treasury yields higher. Instead bond yields fell.

Purportedly, this action is due to the ECB's announcement. I am not so sure.

News Related Reaction?

It's easy to assign a reaction to the news.

But the bond market could just as easily be reacting to something else, like yesterday's news: Fed Hikes Again, Modifies Accommodation Language, Plans on 2 More Hikes in 2018

The long bond can also be looking ahead.

Break Theory

The US yield curve keeps getting flatter and flatter.

No Decoupling

The other common wisdom of the day is the US will decouple from the global markets.

This is the reverse of the 2007 decoupling theory that stated China would decouple from the US economy.

The decoupling theory was wrong then, and it's wrong now. The US is not immune to a slowdown in Europe and China. And it is not immune to an emerging market collapse in general.

We are in a very late-stage position here.

The Fed is nearly done hiking.

The bursting of asset bubbles will be a very "deflationary" thing. I suspect the long bond senses that.

Mike "Mish" Shedlock

Comments
No. 1-8
Snow_Dog
Snow_Dog

Well, if you’re Japan and you decide to print your way out, then it’s actually your own grandchildren’s money that you borrow into existence.

If you’re the EU, your borders will be so overrun with strangers that you may have less hesitation to create tons of currency that will become the debts of your new fellow citizens.

Snow_Dog
Snow_Dog

sarc\ off.

We’re in a nascent recovery, approaching take off velocity.

sarc /off.

Stuki
Stuki

Japan has been “managing,” by decreasing population in lockstep with activity. Along with starting out from a position that makes current day Germany look like a productivity basket case. The former is tough to pull off, unless you are an island at a far corner of the world. The latter unless you are at the very top of the world.

Short of systematically shelling million-sized inbound crowds Bonaparte style, in the process turning their beaches as blood red as an Icelandic fjord during whaling season, Europe don’t have the practical option of a Japan style immigration policy. People will just show up at their borders anyway. Just wait until Erdogan, and whomever attempts to come behind him, looses what fragile control government/the military still have over Turkey, and that place turns into a Syria of infighting….. Or perhaps the Mullahs lose control in Iran…. Or the Saudi regime starts having hickups…. Or, leaving the ME aside, some enterprising soul finds a way from Africa’s war torn interior, to refugee boat pickups on the Mediteranean… And then phones home a picture of a paystub once in Europe……. Japan never faced any of this, being surrounded by either one-child-policy China, literally-in-chains North Korea, drink-yourself-infertile Russia, or booming-economy-with-plenty-of-opportunities emerging Asia.

caradoc-again
caradoc-again

Japan managed, it's reasonably homogeneous and a single entity. How do you keep such a diverse group as the EU from infighting as deflation grinds on and on for year after year without even a shared language or single fiscal authority. I also wonder what is the lower bound for the Euro at which exports don't respond people notice the inflation and the ECB is squeezed into a rate rise response against its will.

channelstuffing
channelstuffing

like the Fed ,ECB will pretend (play make believe) to end asset purchases while covertly continuing to print trillions and buyin everything within sight and hearing (until they can't)

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