Central Banks Have Become The Markets
Politics / Central Banks Jun 16, 2014 - 07:38 PM GMTBy: Raul_I_Meijer
The cluster, – or pride, or cabal – of global central banks, led by the Bank of Japan have come very close to strangling their respective bond markets to the point suffocation with ultra low interest rates, and therefore together moved $29 trillion they had ‘invested’ there into equity markets. Restoring the world’s $100 trillion bond markets to health, even ever, will be a task so daunting that it’s hard to see one single way it can be done. The Bank of Japan has become the de facto only buyer of its own government’s bonds, with the result that trading has ground to a halt, literally so for a number of days last week. Yields on global bonds have been manipulated down so much that not only pension funds and other traditional large-scale fixed-income buyers feel forced to move into stocks, it’s even come to the point where central banks themselves, too, make that move.
Bank of Japan’s Bond Paralysis Seen Spreading Across Markets
The Bank of Japan’s unprecedented asset purchase program has released a creeping paralysis that is freezing government bond trading, constricting the yen to the tightest range on record and braking stock-market activity. Historical price volatility on Japanese bonds slid to a 1 1/2-year low of 0.913% on June 13 and a lack of activity delayed trading at least four days last week. The yen has traded in a range of 4.68 per dollar since Jan. 1, the tightest since Japan ended currency controls four decades ago. Average trading on the Topix index is near its lowest level in more than a year. Asset purchases have not only made BOJ Governor Haruhiko Kuroda the biggest player in Japan’s $9.6 trillion bond market, they have also given him the most leverage over currency and equity markets in the world’s third-largest economy.
China’s State Administration of Foreign Exchange (or Safe), which is part of China’s central bank PBoC, has become “the world’s largest public sector holder of equities”, writes the Financial Times, which has seen an upcoming report by central bank research and advisory group Official Monetary and Financial Institutions Forum (Omfif) : “In a new development, it appears that PBoC itself has been directly buying minority equity stakes in important European companies,” Omfif adds.”The trend “could potentially contribute to overheated asset prices”:
Central Banks Shift $29 Trillion Into Equity As Low Rates Hit Revenues
Central banks around the world, including China’s, have shifted decisively into investing in equities as low interest rates have hit their revenues, according to a global study of 400 public sector institutions. “A cluster of central banking investors has become major players on world equity markets [..] Although scant details are available of their holdings Omfif’s first “Global Public Investor” survey points out they have lost revenues in recent years as a result of low interest rates – which they slashed in response to the global financial crisis. The report identifies $29.1 trillion in market investments, including gold, held by 400 public sector institutions in 162 countries. Central banks’ actions aimed at stimulating economies, including quantitative easing, have deliberately sought to push investors into riskier assets, and share prices have risen sharply since 2009 – leading to fears of stock market corrections if economic growth disappoints.
That “could potentially contribute to overheated asset prices” bit is a leading contender for understatement of the new millennium, of course; there’s nothing potential about it, the overheating is a done deal, and the people at Omfif know it. Between corporations utilizing their access to cheap QE related debt to buy back their own shares, and central banks using their own QE funds to first kill markets for their own government bonds and then prop up stock markets, it’s a miracle the latter have ‘only’ risen as high as they have. Because $29 trillion buys a lot of assets. But a behemoth-scale shift from bonds to stocks creates a lot of problems as well. Bloomberg hints at one:
Bond’s Liquidity Threat Is Revealed in Derivatives Explosion
The boom in fixed-income derivatives trading is exposing a hidden risk in debt markets around the world: the inability of investors to buy and sell bonds. While futures trading of 10-year Treasuries is close to an all-time high, bond-market volume for some maturities has fallen a third in the past year. In Japan’s $9.6 trillion debt market, the benchmark note didn’t trade until midday on two days last week. As a lack of liquidity in Italy caused transaction costs in the world’s third-largest sovereign bond market to jump last month, Lombard Odier Asset Management helped propel an eightfold surge in Italian futures by relying more on derivatives. The shift reflects an unintended consequence wrought by central banks, which have dropped interest rates close to zero and implemented policies such as buying debt to restore demand in economies crippled by the financial crisis.
Inefficiencies in the $100 trillion market for bonds may make investors more vulnerable to losses when yields rise from historical lows. “Liquidity is becoming a serious issue,” Grant Peterkin, a money manager at Lombard Odier, which oversees $48 billion, said in a June 11 telephone interview from Geneva. The worry is that when investors try to exit their positions, “there may be some kind of squeeze.” That concern has caused investors to pour into derivatives, which are contracts based on underlying assets that can provide the same exposure without tying up as much capital. As bond trading has slumped, the notional value of over-the-counter contracts soared fivefold in the past decade to a record $710 trillion, based on the latest data from the Bank for International Settlements compiled by Deutsche Bank.
There will be tons of pundits’ comments about how all this is a matter of ‘unintended consequences’, but we should not take that at face value. While QE was advertized as being aimed at reviving the real economy, the actual target from the start was always debt- and derivatives-laden Wall Street banks, and a switch from bonds to stocks fits in perfectly with that reality. The picture seen in the media all day long, every day of rising stock markets keeps a lot of – PR – trouble at bay, illusionary as it may be, and allows for many a trillion here, trillion there scheme to continue happening out of the public’s sight.
Central banks lose revenue because of the low interest rates they themselves engineered to allegedly “help the real economy”. In that same vein, as Tyler Durden notes:
“To summarize, the global equity market is now one massive Ponzi scheme in which the dumb money are central banks themselves, the same banks who inject the liquidity to begin with.”
If the Bank of Japan can become the only game in town for its ‘own’ bonds and kill the market for these bonds that way, what can we expect from central banks moving head first into stocks? What about a permanent high, or, to be precise, a permanent higher, as long as they keep buying, and after that a whole lot of nothing because all trade has been stifled? Why do we even still talk about bond ‘markets’ and stock ‘markets’? Doesn’t that imply there should be actual trading going on?
Central banks can’t cure the real economy with stimulus or illusions, but they can sure do it a lot of harm with both. Bernanke, Yellen, Kuroda and Draghi have dug themselves into a very deep hole, but they don’t care, because you will be counted on to dig them out. While bankers and large shareholders count their loot and their blessings.
By Raul Ilargi Meijer
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)
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