Sometimes economics and financial markets provoke a wry smile. This morning has already provided an example of that as Germany’s statistics office tells us Germany exported 4.6% more in September than a year ago, so booming. Yes the same statistics office that told us yesterday that production was down by 4.3% in September so busting if there is such a word. The last couple of months have given us another example of this do let me start by looking at one side of what has taken place.
We have seen two of the world’s major central banks take steps to expand their QE bond buying one explicitly and the other more implicitly. We looked at the European Central Bank or ECB only on Wednesday.
The Governing Council decided to restart net purchases under each constituent programme of the asset purchase programme (APP)……….. at a monthly pace of €20 billion as from 1 November 2019.
More implicitly have been the actions of the US Federal Reserve as it continues to struggle with the Repo crisis.
Based on these considerations, last Friday the FOMC announced that the Fed will be purchasing U.S. Treasury bills at least into the second quarter of next year.7 Specifically, the Desk announced an initial monthly pace of purchases of $60 billion.
That was John Williams of the New York Fed who added this interesting bit.
These permanent purchases
Also there is this.
In concert with these purchases, the FOMC announced that the Desk will continue temporary overnight and term open market operations at least through January of next year.
Maybe a hint that they think dome of this is year end US Dollar demand. But we find that the daily operations continue and at US $80.14 billion as of yesterday they continue on a grand scale. So the Treasury Bill purchases and fortnightly Repo’s have achieved what exactly?
If we move from the official denials that this is QE to looking at the balance sheet we see that it is back above 4 trillions dollars and rising. In fact it was US $4.02 trillion at the end of last month or around US $250 billion higher in this phase.
You might think and indeed economics 101 would predict that bond markets would be surging and yields falling right now. But we have learnt that things are much more complex than that. Let me illustrate with the US ten-year Treasury Note. You might expect some sort of boost from the expansion of the balance sheet and the purchases of Treasury Bills. But no, the futures contact which nearly made 132 early last month is at 128 and a half now. At one point yesterday the yield looked like it might make 2% as there was quite a rout but some calm returned and it is 1.91% as I type this.
As an aside this is another reminder of the relative impotence of interest-rate cuts these days as if anything a trigger for yields rising was the US interest-rate cut last week. The Ivory Towers will be lost in the clouds yest again.
The situation is even more pronounced in the Euro area where actual purchases have been ongoing for a week now. However in line with our buy the rumour and sell the fact theme we see that the German bond market has fallen a fair bit. In mid-August the benchmark ten-year yield went below -0.7% whereas now it is -0.26%. So Germany is still being paid to borrow at that maturity but considerably less. Indeed at the thirty-year maturity they do have to pay something albeit not very much ( 0.24%).
There have been a couple of consequences in the UK. The first I spotted in yesterday’s output from the Bank of England.
Mortgage rates and personal loan rates remain near
historical lows, with the rates on some fixed-rate mortgages continuing to fall over the past few months (Table 2.B).
Interest rates on credit cards have increased, although the effective rate paid by the average borrower has remained
stable, in part because of the past lengthening of interest-free periods.
Whilst this is true, if you are going to parade the knowledge of the absent-minded professor Ben Broadbent about foreign exchange options then you should be aware that as Todd Terry put it.
Something’s goin’ on
The five-year Gilt yield has risen from a nadir of 0.22% to 0.52% so the ultra-low period of mortgage rates is on its way out should we stay here.
If we move to the fiscal policy space in the UK then we see that the message that we can borrow cheaply has arrived in the general election campaign.