August 14, 2020

Euro Zone Economy Shows Some Positive Signs

As usual, Mr. Draghi was careful to qualify his upbeat assessment of the euro zone financial crisis, which is now entering its third year. Though financial markets have calmed and some economic indicators have stabilized, he said it was too early to declare a turning point.

Also Thursday, the Bank of England decided to keep its benchmark interest rate unchanged in a dismal economic outlook for 2013 that could keep the economy on the brink of another recession.

Mr. Draghi listed a number of indicators that the euro zone economy could be on the mend. Market interest rates on government bonds have fallen, while stocks have risen. The flow of bank deposits from troubled countries has reversed, and euro zone economies have become more competitive, he said.

Where problems in one country once infected other members of the currency union, optimism is now spreading, Mr. Draghi said at a news conference after the regular monthly monetary policy meeting of the central bank’s governing council.

“There is a positive contagion when things go well,” Mr. Draghi said. “That’s what is in play now.” But, he added, “The jury is still out. It’s too early to claim success.”

Mr. Draghi’s comments suggested that the central bank would not cut its main interest rate further, as some economists have argued it should, given that unemployment is at a record high and inflation is close to the central bank’s target of 2 percent and falling. Many businesses continue to have trouble obtaining credit, without which a recovery of the European economy is unlikely.

Some analysts read Mr. Draghi’s comments as simply a way of justifying the central bank’s inaction.

“Despite the pervasive weakness of the real economy in the single currency area, the E.C.B. is sitting firmly on its hands in the hope that the upturn in sentiment will eventually filter through to the real economy,” Nicholas Spiro, managing director of Spiro Sovereign Strategy, said in a note Thursday.

But others agreed that there were tentative signs that the euro zone economy could emerge from its downturn soon. On Thursday, the Bank of France’s indicator of sentiment in French industry rose unexpectedly.

“Draghi is right to stress that several leading indicators have stabilized recently,” Jörg Krämer, chief economist at Commerzbank, wrote in a note to clients. “The recession in the euro zone is likely to come to an end in spring. This makes a further E.C.B. rate cut unlikely.”

While cutting interest rates is a standard policy tool of central banks, Mr. Draghi has often complained that the central bank has lost much of its influence over rates in troubled countries like Spain. Commercial banks there are already struggling with problem loans and reluctant to lend except at much higher rates.

The central bank’s governing council may have concluded that a rate cut now would be superfluous or even dangerous if it encouraged some investors to take too much risk. Mr. Draghi said on Thursday that some recent leveraged buyout deals were overvalued, though such examples of risky behavior were limited.

Mr. Draghi was asked several times whether the central bank might consider other ways of encouraging credit, for example by emulating the Bank of England’s Funding for Lending Scheme, which rewards banks that lend more. Mr. Draghi said that existing central bank programs were already comparable with those of the Bank of England.

The European bank has been allowing lenders to borrow as much as they want from the central bank at 0.75 percent, if they can provide collateral. But the central bank cannot compel banks to pass on lower rates to customers, and many do not.

The Bank of England on Thursday decided to leave its interest rate at 0.5 percent, a record low, and also held its program of economic stimulus at £375 billion, or $600 billion.

Positive data from the manufacturing industry in December had surprised some economists, but many warned that the British economy would continue to move at a snail’s pace this year because households were reluctant to spend.

“It’s still not looking good,” Vicky Redwood, an economist at Capital Economics, said before the rate announcement. “The underlying picture is still flat.”

Britain had emerged from a recession in the third quarter, albeit with its economy growing slower than expected.

Many British consumers are concerned that a 2.7 percent inflation rate, which is above the Bank of England’s 2 percent target, combined with the government’s austerity program will squeeze their disposable income. Consumer confidence fell in December and the British Retail Consortium called holiday sales “underwhelming.”

If the euro zone is stabilizing, Mr. Draghi can probably take much of the credit. The turnaround began after he vowed last year to do whatever it took to preserve the euro zone and announced a program to buy bonds of countries whose borrowing costs were rising too high.

Mr. Draghi provided another example Thursday of how he has been willing to interpret the central bank’s charter more flexibly than his predecessor, Jean-Claude Trichet, a habit that has pleased investors.

The central bank’s chief mandate is to contain prices. But he added that unemployment was “a very important factor in our assessment of price stability.”

Jack Ewing reported from Frankfurt and Julia Werdigier from London.

Article source: http://www.nytimes.com/2013/01/11/business/global/european-central-bank-leaves-key-rate-unchanged.html?partner=rss&emc=rss

European Central Bank Leaves Key Rate Unchanged

As usual, Mr. Draghi was careful to qualify his upbeat assessment of the euro zone crisis, which is now entering its third year. Though financial markets have calmed and some economic indicators have stabilized, he said, it was too early to declare a turning point.

Also Thursday, the Bank of England decided to keep its benchmark interest rate unchanged amid a dismal economic outlook for 2013 that could keep the economy on the brink of another recession.

Mr. Draghi listed a number of indicators that the euro zone could be on the mend. Market interest rates on government bonds have fallen, while stocks have risen. The flow of bank deposits from troubled countries has reversed and euro zone economies have become more competitive, he said.

Where problems in one country once infected other members of the currency union, optimism is now spreading, Mr. Draghi said at a news conference following the regular monthly monetary policy meeting of the E.C.B. Governing Council.

“There is a positive contagion when things go well,” Mr. Draghi said. “That’s what is in play now.” But, he added, “the jury is still out. It’s too early to claim success.”

Mr. Draghi’s comments suggested the E.C.B. would not cut its main interest rate further, as some economists have argued it should, given that unemployment is at a record high and inflation is close to the central bank’s target of 2 percent and falling. Many businesses continue to have trouble getting credit, without which a recovery of the European economy is unlikely.

Some analysts read Mr. Draghi’s comments as simply a way of justifying the central bank’s inaction.

“Despite the pervasive weakness of the real economy in the single currency area, the E.C.B. is sitting firmly on its hands in the hope that the upturn in sentiment will eventually filter through to the real economy,” Nicholas Spiro, managing director of Spiro Sovereign Strategy, said in a note Thursday.

But others agreed that there were tentative signs that the euro zone economy could emerge from an economic downturn soon. On Thursday, the Bank of France indicator of sentiment in French industry rose unexpectedly.

“Draghi is right to stress that several leading indicators have stabilized recently,” Jörg Krämer, chief economist at Commerzbank, wrote in a note to clients. “The recession in the euro zone is likely to come to an end in spring. This makes a further E.C.B. rate cut unlikely.”

While cutting interest rates is a standard policy tool of central banks, Mr. Draghi has often complained that the central bank has lost much of its influence over rates in troubled countries like Spain. Commercial banks there are already struggling with problem loans and reluctant to lend except at much higher rates.

The E.C.B.’s Governing Council may have concluded that a rate cut now would be superfluous, or even dangerous if it encouraged some investors to take too much risk. Mr. Draghi said Thursday that some recent leveraged buyout deals were overvalued, though such examples of risky behavior were limited.

Mr. Draghi was asked several times whether the central bank might consider other ways of encouraging credit, for example by emulating the Bank of England’s Funding for Lending Scheme, which rewards banks that lend more. Mr. Draghi said that existing E.C.B. programs were already comparable with what the Bank of England was doing.

The E.C.B has been allowing lenders to borrow as much as they want from the central bank at 0.75 percent, if they can provide collateral. But the E.C.B. cannot compel banks to pass on lower rates to customers, and many do not.

The Bank of England on Thursday decided to leave its interest rate at 0.5 percent, a record low, and also held its program of economic stimulus at £375 billion, or $600 billion.

Positive data from the manufacturing industry in December had surprised some economists, but many warned that the British economy would continue to move at a snail’s pace this year because households were reluctant to spend.

“It’s still not looking good,” Vicky Redwood, an economist at Capital Economics, said before the rate announcement. “The underlying picture is still flat.”

Britain had emerged from a recession in the third quarter, albeit with its economy growing slower than expected.

Many British consumers are concerned that a 2.7 percent inflation rate, which is above the Bank of England’s own 2 percent target, and that the government’s austerity program will squeeze their disposable income. Consumer confidence fell in December and the British Retail Consortium called the holiday sales “underwhelming.”

If the euro zone is indeed stabilizing, Mr. Draghi can probably take much of the credit. The turnaround began after he vowed last year to do whatever it took to preserve the euro zone and announced a program to buy bonds of countries whose borrowing costs were rising too high.

Mr. Draghi provided another example Thursday of how he has been willing to interpret the central bank’s charter more flexibly than his predecessor, Jean-Claude Trichet, a habit that has pleased investors.

The E.C.B.’s prime directive is to contain prices. But Mr. Draghi has been adept at using the language of price stability to justify broader goals. Mr. Draghi noted during the press conference that, unlike the Federal Reserve in the United States, the E.C.B.’s mandate did not require it to promote job creation. But he added that unemployment was “a very important factor in our assessment of price stability.”

Julia Werdigier reported from London.

Article source: http://www.nytimes.com/2013/01/11/business/global/european-central-bank-leaves-key-rate-unchanged.html?partner=rss&emc=rss

High and Low Finance: Reading Pessimism in the Bond Market

Three decades ago, that was what some people said bonds really were. The interest the bond paid would not be enough, they said, to offset the declining value of dollars as inflation added up. The “real” — after-inflation — bond yield would be negative.

That was just as the great bull market in bonds began. Bonds were great investments, and the bond bears turned out to have been dead wrong.

Now we have come full circle. The government is selling bonds that are absolutely, positively guaranteed to not pay enough to offset inflation over the coming years. It is even possible that someone who bought a new Treasury security that will be issued on Monday will end up getting fewer dollars back than he or she invested — interest and principal combined — between now and when the bond matures in 2017.

The securities are inflation-protected Treasury notes. If inflation ticks up significantly over the coming years, investors will get back more dollars than originally invested. But not enough to come close to keeping up with inflation. If there is no inflation, they will get back less than they invested.

When those securities were auctioned last week, buyers agreed to accept a real yield of negative 1.496 percent. It takes a lot of pessimism — about the economy and the future of the United States — to think an investment certain to lose money is an investment worth making.

The great bear market in bonds, both corporates and governments, lasted 35 years, from 1946 to 1981. The bull market lasted about 30 years. A new bear market almost certainly has begun.

If that is true, those seeking a little income now by going out the yield curve will come to rue the decision. They will get the promised interest, but as market interest rates rise, the price of those bonds will decline and decline and decline.

On Oct. 26, 1981, which can be dated as the bottom of the great bond bear market, the yield on 30-year Treasury bonds rose to 15.21 percent. On that date, a Treasury bond issued in 1970 and scheduled to mature in 2000 was quoted at less than 56 percent of face value. It had a coupon of 7.875 percent, but that was not deemed enough to compensate investors for the risk.

At market extremes, it is often worth analyzing what has to be true for a given investment to be a good, or bad, value. Back in 1981, you had to assume that inflation would not only remain in double digits for decades, but that it would also continue to rise, for a newly issued Treasury bond to turn out to be a bad investment. Yet many investors assumed it would be. After all, a lot of people on Wall Street in 1981 could not remember a time when bonds were good investments.

A few weeks before rates peaked, Seth Glickenhaus, an experienced bond trader and head of Glickenhaus Company, an investment advisory firm, spoke the conventional wisdom when he said, “Anyone who buys a bond today to hold for more than five years is out of his mind.”

Michael Gavin, the head of United States asset allocation for Barclays, pointed out this month that over the past 30 years an investor who stayed invested in American, or British, 10-year government bonds would have earned more than 5 percent a year over inflation.

“It does not require advanced market math to understand that returns like these are no longer remotely plausible,” he wrote. “But they say that fish don’t know that they live in water — until they are removed from it — and we wonder if some of the many market participants whose entire professional experience has been conditioned by the financial backdrop created by the bond market rally might underestimate some consequences of its termination.”

Even if rates stay where they are for the next five years, and investors collect the interest coupons, he said, “bonds will be transformed from wealth creators into wealth destroyers.”

Or at least they will be unless there is severe deflation. For that is the only situation that will allow today’s new long-term bonds to turn into good investments.

Is that possible? To think it is likely, you pretty much have to assume that economic growth is a thing of the past in both the United States and Europe. It is not an optimistic outlook.

Floyd Norris comments on

finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2012/12/28/business/reading-pessimism-in-the-bond-market.html?partner=rss&emc=rss

Off the Charts: Risk Creeps Up in Long-Term Bonds

Fed officials do not think that will happen until late 2015, but they could be overly pessimistic. A year ago, they thought that the rate would not get as low as it is now until 2014.

The prolonged low level of interest rates — both short-term rates that are administered by the Fed and longer-term rates that are more subject to market forces — has caused many investors to search for yield by purchasing longer-term bonds.

That has provided a bonanza for companies in the United States and in many emerging markets, where the amounts of newly issued bonds have risen rapidly.

“Almost any kind of corporate activity is acceptable to the bond market,” said Michael Shaoul, the chief executive of Marketfield Asset Management. “That is really a sign the bond market is becoming indiscriminate.”

For a bond investor, there are two things that can go wrong. The first is credit quality, when bonds either default or at least fall in market value because a default seems more likely. The second is interest rate risk — the risk that market interest rates will rise significantly.

Mr. Shaoul said he thought investors in emerging market bonds were more likely to run into credit problems, while American bond buyers were more likely to face interest rate problems as the American economy improved.

“Five years down the road,” he said, “you are likely to have significantly higher interest rates.”

For a bond market investor now, the choice is to stick to shorter-term bonds, and get very low yields, or to move to longer-term ones that pay higher interest rates but that could lose market value if the interest rate offered on new bonds rose.

Much of the recent issuance in bonds has been because of refinancing, in which companies repay existing bonds with money borrowed on better terms. For holders, it can seem the worst of both worlds: if rates rise, they have old bonds that have lost value. If rates fall, their old bonds are redeemed by the company, depriving them of the yield they expected.

As can be seen in the accompanying graphic, corporate bond issuance in the United States has risen to record levels this year, and the average interest rate on high-yield bonds, also known as junk bonds because they are rated below investment grade, has fallen even more rapidly than have rates on higher-quality bonds.

Martin Fridson, the chief executive of FridsonVision and a veteran high-yield market analyst, said he thought high-yield investors were likely to lose money in 2013, as declines in prices offset the interest income realized from the bonds.

His model says the yield spread between the Bank of America Merrill Lynch High Yield Master II index and similar Treasury securities should now be around 6.5 percentage points, based on historical spreads as well as economic conditions, current default rates and the relative availability of bank credit. The actual difference, as shown by the chart, is about 5.3 percentage points, which he thinks is not enough to offset the risk.

Floyd Norris comments on finance and the economy on nytimes.com/economix.

Article source: http://www.nytimes.com/2012/12/15/business/risk-creeps-up-in-long-term-bonds.html?partner=rss&emc=rss