Former Federal Reserve Chair Ben S. Bernanke is writing a book entitled “The Courage to Act: A Memoir of a Crisis and Its Aftermath.”
Courage? Courage to flood the global economy with liquidity? Courage to keep interest rates declining since 1981? Courage to create massive asset bubbles? Courage to distort financial markets to the point where down is up and up is down?
With Janet Yellen at the helm along with ECB’s Draghi and UK’s Carney, sovereign interest rates are falling even further than Bernanke’s liquid courage.
Now, Mexico is falling into the conga line with a 100 year sovereign bond as Switzerland goes negative on their 10 year sovereign debt.
Until Wednesday, no country had ever sold 10-year debt that gives investors a yield of below 0%. And no country had ever issued a 100-year bond denominated in euros.
But in the latest stark sign of how easy the era of easy money has become, Switzerland on Wednesday sold 10-year bonds that investors are actually paying to hold, while Mexico lined up a rare transaction to borrow euros it promised to repay a century from now—at a yield of 4.2%.
The two extraordinary milestones reflect Europe’s extraordinary environment.
Even as the U.S. Federal Reserve prepares to raise interest rates, the European Central Bank is forcefully driving them down. The Swiss National Bank, eager to keep its currency from soaring too far above its eurozone neighbors’, has itself shoved interest rates below zero.
The consequence is a strange collection of monetary phenomena: The ECB has begun charging commercial banks to keep money on deposit. Denmark’s central bank has furiously printed kroner to mitigate a flood of capital into the country. Even Spain, which once looked on the cusp of fiscal collapse, is able to sell short-term Treasury bills that give investors back less principal than they started with.
These plummeting yields—which mean higher bond prices—have delivered bumper returns for existing bondholders. And they have led to exceptionally cheap deals for borrowers. Also winning from the stimulus are stock investors: Most European indexes have rallied this year, and some are at or near record highs.
But the Swiss and Mexican deals push boundaries of yield and maturity even further. Several European countries inside and outside the eurozone have sold government debt with maturities of up to five years at negative yields, which means investors effectively pay for the privilege of holding it. They could profit if they sell the bonds at even higher prices.
Why should investors purchase sovereign debt at negative yields or for 100 years? The answer is that 1) Central Banks like The Federal Reserve purchase much of the low/negative interest rate debt, 2) banking regulations often require lenders to hold own-country sovereign debt, 3) pension funds have rules requiring a certain a percentage of their assets in safe sovereign debt. Also, in a diversified portfolio, investors will want to hold a percentage in sovereign debt as a defense against a collapsing stock market.
Yellen along with other Central Bankers are continuing what Bernanke started in 2008, flooding the global economy with liquidity and creating asset bubbles and distortions.
“It takes courage to do what I did. Why doesn’t anyone believe me?? BURP!!”
Arthur Cutten at Jesse’s Cafe Americain worked his magic again.