Economy: living at zero rates

Allianz Oliver Bäte’s number one rating was categorical: if the yields on German government bonds, the Bund, remain negative, the country’s first insurance group will no longer buy them. A few days later, Bavarian President Markus Soeder announced in an interview with Bild that he had asked Berlin to introduce a law in Germany prohibiting banks from passing on to customers the cost of negative rates, a “tax” already applied in Switzerland to the richest current accounts.

Statements, those of the captain of the company and the Bavarian politician, reflecting opposing interests, but linked by a double thread to August, the craziest ever for interest rates, literally collapsed below zero. A violent bearish turn that in a few weeks has changed the financial life of savers, companies, governments. And for a long time.

The turning point during this hot summer for the climate, but “frozen” for the yields. Until a couple of months ago the ten-year German Bund was still in positive territory, while on August 28 its yield had fallen to -0.71 percent. A few hours and the 10-year bonds of Spain and Portugal, which a few weeks earlier paid over 1 percent, also entered the negative area. A chain reaction also arrived in the United States, where 30-year bonds slipped to their all-time low (1.91 percent), yielding less than three months (1.99 percent) and with a reversal of the curve that usually heralds a recession. But the figures reported by the American agency Bloomberg better illustrate this earthquake: the mass of negative rate bonds in the world, in fact, has risen from about 8.3 trillion dollars at the end of 2018 to the current 17 thousand. In other words, one-third of all bond issues in circulation today ended up below zero, with the debtor receiving interest from the creditor and not vice versa, as happens in a normal world. 

But this is probably no longer a normal world. On August 30, the German group Siemens launched a 3.5 billion euro bond issue: the two-year tranche made (so to speak) -0.315 percent, the highest negative rate ever for a corporate bond. Yet the securities have gone like wildfire among institutional investors. Crazy? Not really, rather struggling with a German government bond of the same maturity that “makes” -0.9 percent and already discounts a new Qe, that is, a further plan to buy back bonds by the European Central Bank led until October by Mario Draghi and then pass into the hands of Christine Lagarde. “The fall in interest rates is not yet over, but will become even more pronounced in the coming months,” confirms Antonio Cesarano, chief global strategist at Intermonte Sim. “The primary trend will remain bearish, with some temporary increases. The situation in Germany will only change when it starts spending and making deficits again. At that point, the country will return to the market with new issues of Bund and will mitigate the current scarcity effect, which has brought German bonds so below zero. The idea is that, in view of the worsening global recession, German bonds are a safe haven asset so investors are even willing to pay to have them in their portfolio. 

But who benefits from this? “The benefits are above all for the Treasuries of the various countries that collect resources at ridiculously low prices and for this reason they are extending the maturity of their issues, as also requested by institutional investors” continues Cesarano. This is the case with Sweden and the United States, which project bonds at 50 and even 100 years, following the example of Austria and its secular bond that now yields 0.7%. A misery, if you take into account that our 10-year BTP – despite being at its all-time low – still has a coupon of 0.8 percent, the only positive exception in Europe along with Greece.

The new fashion, therefore, are the bonds Methuselah. “The world is going through a dramatic demographic transition,” wrote Carlos Carvalho, Andrea Ferrero and Fernanda Nechio in a recent study for the Federal Reserve Bank of San Francisco. “In most advanced economies, actual and projected longevity is steadily increasing. Increasing life expectancy prolongs people’s retirement periods, generating additional incentives to save rather than spend throughout the life cycle… and increasing life expectancy puts downward pressure on rates.

So better to get used to living with rates below zero. Maybe even for mortgages. The third Danish bank, Jyske Bank, has just anticipated its intention to offer its customers ten-year loans at a negative fixed rate of 0.5%. Nordea Bank has also announced a 20-year zero-interest loan and a 30-year negative one. This means destroying bank balance sheets (Goldman Sachs estimates that new cuts in the cost of money would translate into a -30 percent profit for German institutions and a -10 percent for Italian ones), but also that banks prefer to balance a small loss rather than block loans while waiting for a global recession that is becoming increasingly concrete. “The negative rates can be the reflection of a choice of monetary policy and an assessment of the markets on the economic outlook,” said Michele Morra, portfolio manager of Moneyfarm. “The point is not so much the negative rates but the context of low rates, which is likely to last, with the peculiarity that in Europe we have not gone through an upward phase. And this anomalous situation is destined to have consequences on the capital market, on the labor market.

So how do we get out of this trap, where the central banks continue to put money in but the economy doesn’t start again? One solution is proposed by BlackRock, the largest investment company in the world, dusting off a provocation of Nobel prize winner Milton Friedman, the so-called helicopter money: better to distribute the money to citizens instead of relying on the Quantitative easing, so far unsuccessful in bringing inflation in the Eurozone to sufficient levels and push the economy. In short, it’s better to throw money out of a helicopter than to put it in the hands of the Fed and ECB.

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