Central banks / bond markets

Central banks need relief

At the latest since the ECB’s latest loosening package in September, the limits of monetary policy have been the subject of renewed discussion. Because the lower interest rates slide into the red, the more questionable the positive real effects on the economy that the central bank expects them to have. At the same time, the risks to financial stability are increasing, whether due to excessive indebtedness or price exaggerations on the stock, bond or real estate markets. But the financial markets have long since adjusted to the overabundant supply of liquidity. The hunt for returns leads to increasingly risky investments. And an excessive indebtedness does not seem to represent a large risk with a zero or negative interest rate first of all. This makes it all the more difficult for central banks to get out of low interest rates. In order to make their task easier for the central banks,…

Till the jug breaks

Central banks, in particular the ECB and the Fed, are increasingly concerned about the consequences of low interest rates for financial stability. Many asset classes have developed very positively in recent years and in some cases have moved significantly away from their fundamentally justified prices. Valuations have become expensive. This applies to the real estate markets, the bond markets and the stock markets. This development should not come as a surprise, as reference has often been made to this expected scenario. Low interest rates play the most important role. Actually, they are supposed to stimulate investment and consumption. In the current cycle, however, demand for credit has remained quite weak and the expected and hoped-for effects on the real economy have failed to materialise. On the other hand, low interest rates have led investors to take ever greater risks in their search for returns. This was supported by the hitherto…

US Federal Reserve pauses… until the next crisis

The minutes of the US Federal Reserve’s 29th and 30th October meeting, released yesterday evening, show that the currency guardians continue to view the risks to the economic outlook as high. Against this backdrop, a rate cut would have been appropriate, even though the decision to do so was a close one. However, most FOMC members were of the opinion that the monetary policy orientation was now appropriate following the recent interest rate move. This makes further rate cuts unlikely for the time being. For the interest rate cuts to continue, the economic outlook would have to deteriorate noticeably again. The risks associated with the still smouldering trade conflict with China are high and can quickly become a significant economic risk. There are different interpretations of the state of negotiations between the USA and China. It should be noted, however, that both sides should welcome a positive development. On the…

Ciao, Signor Draghi!

Ciao, Signor Draghi! Mario Draghi’s term as President of the ECB ends after eight years. At his last press conference there were no more monetary surprises, but this meeting was no non-event either. Compared to his opening statement at the September Council meeting, the topmost monetary watchdog drew a somewhat gloomy economic outlook. The central bank superiors expect the economy to remain weak. There is thus a risk that the recession in the manufacturing sector could also affect the service sector. This would also damage the domestic economy. Against this backdrop, the monetary policy measures recently discussed by the Governing Council of the ECB should be seen as a hedge. However, the hopes of market players to obtain further information on the precise structure of bond purchases were disappointed. It is therefore to be expected that APP purchases will be based on past practices. However, subsequent adjustments cannot be ruled…

Libra – Major attack on the world’s central banks?

Hardly a day goes by without one or more representatives of politics, financial supervision and central banks commenting on the crypto currency Libra planned by a consortium around the tech giant Facebook. And it is mostly loud criticism or at least admonitory words that are to be heard. This shows above all one thing: even if the Libra project is at a preliminary stage, the private global single currency is perceived by many as serious competition for the established monetary and financial system. This is not least due to the large user base and the financial strength of the companies involved. It is certainly not the goals set by the initiators that inspire fear in the critics. Who would have anything against opening up access to financial services, especially to those people in the world who have so far been excluded – provided they only have a smartphone and Internet…

Money market in the USA dries up, US Federal Reserve now steers against it

The liquidity problems on the US money market have existed for some time and have steadily intensified in recent months. In mid-September, the US Federal Reserve pumped liquidity back into the money market for the first time in more than a decade. The measure became necessary after the effective funds rate (EFFR), i.e. the interest rate at which banks lend money to each other, had risen significantly. The trigger for this escalation was a chain of events – such as the quarterly payments of corporate tax or the payments for new T-Bill issues by the banks – which all contributed to a further shortage of already tight liquidity. As a result, the US overnight repo rate rose sharply (intraday: 10%!). The Fed had to intervene with several injections of liquidity totalling around USD 75 billion, causing money market rates to fall again. After that, it was actually clear that the…

1 2 26