Central banks / bond markets

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…

ECB has reached the limits of its possibilities

Today, the ECB has actually delivered almost everything that investors wanted. As expected, the deposit rate has been lowered to minus 0.5%. This measure is accompanied by an allowance for which there is no negative interest. The purpose of this staggering is to keep the banks‘ burden from the negative deposit interest rate within limits. This differentiation should make life easier for German, French and Dutch banks in particular. Together, they account for almost 70% of the ECB’s surplus reserves. However, the ECB must ensure that money market rates do not move upwards as a result of this graduated system. Bond purchases are to be resumed on 1 November, but this time without a fixed end date. The programme is to be implemented almost until it raises key interest rates again. Since this can take a very long time, this is a clear signal to the markets that the ECB…

ECB needs to create more room for manoeuvre for a new bond purchase programme

The ECB is preparing to resume net new purchases of EMU government bonds (PSPPs), which it could announce at its September meeting. A continuation of the PSPP would, however, be severely limited in time under the current programme conditions. In the case of Germany, the ESCB should already reach the issuer limit after about seven months. A change in the PSPP conditions is therefore often discussed. In practice, however, adjustments are likely to be much more difficult than generally assumed. An increase in the issuer limit from currently 33% to 50% could not only violate the ban on monetary state financing, it would also have virtually no effect without the adjustment of the issue limit. However, a change in the current emission limit of 33% would also raise questions. All EMU government bonds issued since 2013 contain a Euro area model Collective Action Clause (CAC). If the ECB were to…

US Federal Reserve leaves everything open, but interest rates should fall

Many market participants hoped for further information from the central bank conference in Jackson Hole as to whether the latest adjustment in the middle of the economic cycle would not develop into a full-blown key rate reduction cycle after all. Fed Chairman Powell, however, did not want to commit himself and gave no concrete indications of the future path of monetary policy. On the other hand, he was open to the idea that there was no manual for dealing with the current trade conflict. This in turn points to a high degree of uncertainty in the FOMC itself. In my view, it is relatively certain that key US interest rates will continue to fall in the course of the year. The exciting question, however, is whether further rate cuts will have a positive effect on the real economy at all, or only boost the financial markets. Political pressure on the…

International race to lower interest rates

Interest rates are falling around the globe. At the beginning of 2019 it still looked as if the just started normalization of monetary policy, starting with the US Federal Reserve, would gradually be transferred to the other central banks of the world. Today, on the other hand, the signs are that interest rates will be cut again worldwide. Following the Fed’s latest rate cut, various other central banks have in any case also made a move in the direction of expansive monetary policy. For example, the monetary authorities in India, Thailand, New Zealand, Brazil and Peru have followed suit and increased the degree of expansion of their monetary policy. The ECB will probably announce a major package of measures in September. Political pressure on the US Federal Reserve is likely to remain high in the coming months. Other central banks could then follow suit again. However, if this supposed race…

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