A Negative Disposition?
Our friend David Janny at Morgan Stanley insisted we bark up the NIRP tree. As Dave is an amiable chap, and even if he doesn't recall whose blast from the past, yet apropos for today voice over this is from 2009, we shall oblige...
Speaking of superhero's and their voices, after all the shooting, cash, chaos and coffins over the last two weeks, the "man with no name" in the "blood money" Dollar Series needs a rest this week.
Speaking of which, multiple UST auctions with a $278bln total, which at avg. 3.5 bid to cover might pre- occupy near $1trln in liquidity. Moving West...
Many people are mystified as to how bond yields can become negative, and why anyone would want to invest money in such an asset. Rather than carrying on, inquiring minds should keep reading...
We have previously Nattered regarding potential deleterious effects of NIRP, and recommend taking the NIRP: Marshmallow Test. There are a few reasons and causes for NIRP, for simplicity sake we shall limit our Nattering to four.
A primary cause of NIRP is ZIRP policy where central banks such as the FED target a low or near zero cost of loan funds. Going low and staying low for prolonged periods can aside from lower fiscal back pain and arthritic economic knees, have many other deleterious side effects.
A 2nd contributing cause are QE programs under which the central bank purchases sovereign bond issuance (amongst other debentures). Said purchases can affect both flow (timing and quantity) and stock (level) of bonds, which effects market pricing and yield distortions viz. artificially lower float, can result in higher bid, price and lower yields.
A 3rd contributing cause are regulatory capital, reserve and funding constraints (GSIB, LCR, Basel 3 etal.) Said mandated covenants, conditions and restrictions can affect market participants desire (liquidity preferences) to hold bonds as collateral, and balance sheet capacity which effects market transacting (buy, sell, lend (repo and reverse repo)), which effects market volume, liquidity, price and yield.
Said ZIRP targeting, QE purchases, CCR's can and do modify market participants (in a search for margin and yield) investment strategies and behaviours viz. market distortions in asset valuations, desirability of collateral, disintermediation of certain market making participants, liquidity preferences, all of which can necessitate financial alchemy for arbitrage, all of which can set the stage for ZIRP.
Speaking of the latter which oft involves synthetic derivatives, could that be a fourth cause of NIRP? Let's look at an Italian 10 yr bond...
The following Sept 4th Tweet had a "sticky zero" and should have read -190 bps...
Below, in the bigger picture, since Oct 19th, 2018 from 3.783 down to 0.758 on Sept 12, 2019 for 302bps. What else happened in Oct 2018? Think McFly, Think...
Why would anyone on the planet be buying those Italian 10's like hot cakes?
Hint: Help McFly think about what happened in October 2018, January and March 2019 by looking for "negative" clues here: That's The Signpost Up Ahead?
Recommended Reading:
A Fistful Of Dollars?
For A Few Dollars More?
The Good, The Bad And The Ugly?
A Coffin Full Of Dollars?
Speaking of superhero's and their voices, after all the shooting, cash, chaos and coffins over the last two weeks, the "man with no name" in the "blood money" Dollar Series needs a rest this week.
Speaking of which, multiple UST auctions with a $278bln total, which at avg. 3.5 bid to cover might pre- occupy near $1trln in liquidity. Moving West...
Many people are mystified as to how bond yields can become negative, and why anyone would want to invest money in such an asset. Rather than carrying on, inquiring minds should keep reading...
We have previously Nattered regarding potential deleterious effects of NIRP, and recommend taking the NIRP: Marshmallow Test. There are a few reasons and causes for NIRP, for simplicity sake we shall limit our Nattering to four.
A primary cause of NIRP is ZIRP policy where central banks such as the FED target a low or near zero cost of loan funds. Going low and staying low for prolonged periods can aside from lower fiscal back pain and arthritic economic knees, have many other deleterious side effects.
A 2nd contributing cause are QE programs under which the central bank purchases sovereign bond issuance (amongst other debentures). Said purchases can affect both flow (timing and quantity) and stock (level) of bonds, which effects market pricing and yield distortions viz. artificially lower float, can result in higher bid, price and lower yields.
A 3rd contributing cause are regulatory capital, reserve and funding constraints (GSIB, LCR, Basel 3 etal.) Said mandated covenants, conditions and restrictions can affect market participants desire (liquidity preferences) to hold bonds as collateral, and balance sheet capacity which effects market transacting (buy, sell, lend (repo and reverse repo)), which effects market volume, liquidity, price and yield.
Said ZIRP targeting, QE purchases, CCR's can and do modify market participants (in a search for margin and yield) investment strategies and behaviours viz. market distortions in asset valuations, desirability of collateral, disintermediation of certain market making participants, liquidity preferences, all of which can necessitate financial alchemy for arbitrage, all of which can set the stage for ZIRP.
Speaking of the latter which oft involves synthetic derivatives, could that be a fourth cause of NIRP? Let's look at an Italian 10 yr bond...
The following Sept 4th Tweet had a "sticky zero" and should have read -190 bps...
Since 05/31 -1900 bps on the Italian 10 year... $IT10YT=RR chart via @investingcom - //www.investing.com/ https://t.co/3mPlwDrEFf— The Nattering Naybob (@NaybobNattering) September 4, 2019
Why would anyone on the planet be buying those Italian 10's like hot cakes?
Hint: Help McFly think about what happened in October 2018, January and March 2019 by looking for "negative" clues here: That's The Signpost Up Ahead?
That's the signpost up ahead... With month end, quarter end, Chinese Golden Week (Oct 1- 7th) funding needs, and seasonal ROC in monetary flow coming to a crawl.... a dearth of dollar "liquidity" stemming from a dearth of dealer balance sheet capacity, could turn into a major shit show and soon.That's not the clue Baby Ducks, just some breadcrumbs. More to come in A Wayward Italian in Kansas? Stay tuned, no flippin.
Recommended Reading:
A Fistful Of Dollars?
For A Few Dollars More?
The Good, The Bad And The Ugly?
A Coffin Full Of Dollars?
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