It’s really crazy what this ecb has wrought wolf street gbp usd fx


At the end of the week, something special happened, something totally absurd but part of the new normal: the average yield of euro-denominated junk bonds – the riskiest, non-investment-grade corporate bonds – dropped to the lowest level ever: 2.77%.

April 26 had marked another propitious date in the annals of the ECB’s negative yield absurdity: the average euro-denominated junk bond yield had dropped below 3% for the first time ever.

By comparison, what is considered the most liquid and safe debt, the 10-year US Treasury, carries a yield of 2.33%; the 30-year Treasury yield hovers at 3%.

This chart of the BofA Merrill Lynch Euro High Yield Index (data via FRED, St. Louis Fed), shows just how crazy this has gotten in the Eurozone:

It’s not like there’s deflation in the Eurozone, despite rampant scaremongering about it.

The official inflation rate in April was 1.9% for the 12-month period. As this chart shows, it’s not likely to go away any time soon (via Trading Economics):

In other words, the average “real” junk bond yield (after inflation) according to the above two indices is now 0.87% uk us exchange rate. That’s the return bond-buyers get as compensation for handing their money for years to come to non-investment grade corporations – as per an average of the ratings by Moody’s, S&P, and Fitch – with an appreciable risks of default looming on the horizon.

Issuing junk bonds in euros is not just the prerogative of European companies. It includes issuance of junk-rated US companies that seek out this cheap money. “Reverse Yankees,” as these bonds are called, have become a large factor in euro-bond issuance.

And investors that accept a “real” compensation of only 0.87% per year to deal with these risks – have they gone nuts? You bet. The Wrath of Draghi.

As part of its now reduced €60 billion-a-month QE program, the ECB buys government bonds, “covered bonds,” investment-grade corporate bonds, and asset-backed securities. It also cut its deposit rate to negative -0.40%. All of this with the explicit goal of driving up all asset prices and repressing all yields across the corporate and sovereign spectrum, from the best to the worst.

What the ECB doesn’t buy is junk bonds dollar pound exchange rate history. That doesn’t mean it can’t end up with junk bonds on its balance sheet, if for example, a country or a company whose bonds it holds gets downgraded to junk.

As a result of the QE program and the negative-interest-rate policy (NIRP), numerous government bonds are now trading at a yield below zero. For example, the German five-year yield is -0.33%. This hounds investors with a return after inflation of -2.23%! Investors who seek any kind of positive return in euro-denominated bonds have to flee into riskier assets, such as junk bonds. Or they have to flee to other currencies, such as dollar-denominated bonds. These are the NIRP refugees. Why are NIRP refugees risking so much for so little?

Many are institutional investors that have to buy euro bonds, such as life insurance companies and bond funds. Ultimately they don’t care because it’s not their money usd inr live. It’s other people’s money (OPM) funny jokes tagalog. Institutional investors get paid to manage it. All they have to do is go with the market. If it blows up in their face, and everyone is in the same mess, they’re just fine. It’s OPM that blows up.

As the ECB buys more and more bonds, repressing yields in the process, investors have to bid against the ECB, further pushing down yields. But a central bank like that is special usd inr forward rates. It’s the relentless bid. It’s bidding high on purpose because the purpose is to drive up bond prices and push down yields. Institutional investors, such as pension funds and life insurance companies that have to buy bonds don’t have a choice. They have to play. What’s the outcome?

Someone is going to take the loss. When companies default on their debt, investors get stiffed – usually pension-fund beneficiaries and the like whose money this is. The OPM. They should have been compensated for taking this risk. What the Wrath of Draghi accomplished is that they are forced to take these risks without compensation.

So companies are issuing euro bonds no-holds-barred nz to usd. From Spanish banks that have unleashed a flood of bonds to Mexico’s teetering state-owned oil company Pemex which sold a €4.3 billion of euro bonds in February.

But bonds aren’t like stocks usa today sports scores. Bonds get redeemed (if they make it that long) at face value. If held to maturity, the only capital gains occur if the bond was bought at a discount. But in the current environment in which yields have plunged, bonds are acquired in the secondary market at a premium. But the premium evaporates as the bond gets closer to the maturity date. Traders and hedge funds can make a buck if they unload the bonds early enough and if yields continue to drop. But for institutional investors that hold bonds to maturity because their business model requires them to, there’s no good exit.

Oh, and the unintended consequences of trying to regulate a monster. Read… $500 Trillion in Derivatives “Remain an Important Asset Class”: Hilariously, the New York Fed

Micheal Milken was able to create the junk bond business at Drexel because he was able to convince investors that the companies could generate the profits to pay off the high yield bonds.

What the junk bond yield you describe is saying is, these companies can’t squeeze out enough profit to pay more binary algorithm. In a sense, the low yield of the junk bonds is a signal to the market of future profitability or the lack thereof.

‘Following the binary choice’ is a great thought exercise. For example, the ECB can stop QE or continue QE. For either event each consequence follows a binary choice. After each trail is followed a bit, the most likely course in the near future and far future becomes obvious.

The EU will end either way. The EU public is paying their way with low to negative rates which indirectly consume savings either via debt that will eventually default or forgone income from normalized rates. Benefits only look free, but the worst effects will be much further down the road if QE remains until it can’t. The people of the EU did this to themselves and continue to embrace it us dollar rate today in indian rupees. They ostensibly have all agreed to live on borrowed and printed money until they can’t xag usd. They just don’t talk about it openly.

Basically, everyone in the EU has agreed to live on the credit card and feels special because they can control interest rates and never be cut off unless the entire world gets tired of it. Anyone who doesn’t like it, such as savers, don’t matter because the system slowly confiscates their savings over time. Borrowers are the thrifty ones in this plan since someone else is paying their way … the systems is designed to do it that way.

There is nothing to prevent the ECB from changing their rules and buying junk bonds in the future..Interest rates have nothing to do with risk or inflation ,but all to do with the PERCEPTION that the Central Banks are all knowing and all powerful.

All Euro countries start issuing zero coupon bonds with maturities of at least 50 years.Obviously no interest is paid on these bonds.The ECB then buys these bonds with money printed out of thin air.Each country then uses the money raised from these bonds for any purpose they like,including lending to corporations with low credit ratings and slashing taxes .After 5 years the ECB starts writing off these zero coupon bonds resulting in no payments from any country to the ECB. The result is that each country gets monies to use as they wish and the ECB theoretically losses a bunch of money.But since this money was conjured from thin air no losses are taken.

Zero coupon long maturity debt is the the logical extension of current ECB policies.No interest payments and no defacto repayment of principal .NO PROBLEM,RIGHT!!!

Your example is a good,simple mathematical representation of what negative interest rates represent Refinancing such bonds with more bonds avoids any default issues .

The only argument for buying bonds with negative interest rates(other than to quickly flip them to the ECB) is the collapse of the Euro to be replaced by each countries individual currencies.And even under this circumstance only those currencies with the strongest finances would benefit.

Given the substantial accumulation of rather questionable assets in the ECB balance sheet, I am curious as to who is likely to incur the losses as these positions over time revert to their realizable value. The Federal Reserve would appear to have made substantial gains to date on assets accumulated during the various QE’s. This seems a very unlikely outcome in the case of the ECB. Unless you are of the opinion that Southern European Long term sovereign debt issued at near negative yields and nominated in Euros has a very high expectation of positive returns in the long term. A number of very bleak alternative scenarios appear likely. Are ECB losses ultimately to be transferred to the tax payers of the Euro Zone countries in general as I strongly suspect? In this case Northern European taxpayers will ultimately be paying for the fiscal adventures of their southern neighbours.

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