Opinion

Anatole Kaletsky

Now may not be the time to buy bonds

Anatole Kaletsky
Jun 6, 2014 18:35 UTC

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Why are interest rates so low? And how long will they stay that way?

Now that the European Central Bank has passed another historic milestone by imposing negative interest rates on a major part of the world economy, there is one explanation of the unprecedented collapse of interest that everyone can agree on. Central banks can set money market interest rates as low or as high as they please just by giving commercial banks whatever amount of excess credit is needed to keep these rates at the chosen level.

Since early 2009, central bankers all over the world have decided, rightly or wrongly, that interest rates should be lower than ever before in history. Moreover, these policymakers made it clear that they will continue to squeeze interest rates down to near-zero, or even negative, levels until next year and perhaps beyond.

But this obvious answer to the interest rate conundrum only begs a more interesting question: What accounts for the rock-bottom levels not only of the overnight interest rates that central banks set directly, but also the long-term rates that depend on the willingness of pension funds, insurers and private investors to tie up their savings for 10 years or more in government bonds?

If investors were absolutely confident that short-term rates set by the central banks would remain near zero for many years ahead, then the seemingly paltry returns — varying from 2.6 percent down to 0.6 percent — on 10-year bonds issued by the U.S., European and Japanese governments would seem generous. Rational investors would be happy to lock up their money for a decade at these rates. But why are investors as confident about the persistence of near-zero interest rates as today’s low bond yields seem to imply?

anatole  -- ecb headThere are two possible answers, reflecting diametrically opposite economic views. The pessimistic view is that the world economy since the 2008 financial crisis has settled into a “new normal” of weak growth and negligible inflation or even falling prices. Whatever causes they attribute for this economic ice age — financial fragility, demographics, stagnating productivity or the unintended consequences of the post-2008 monetary experiments — proponents of the new normal agree that central banks will keep interest rates near zero for most of the next decade. So today’s historically low bond yields will offer investors much higher incomes than they will be able to secure in future years.

Behind Wall Street’s anxiety

Anatole Kaletsky
Apr 10, 2014 20:49 UTC

The recent economic news has been about as investor-friendly as anyone could imagine.

It started with last week’s strong U.S. employment figures; continued through Tuesday’s reassuring International Monetary Fund forecasts, which put the probability of avoiding a global recession this year to 99.9 percent, and culminated in dovish Federal Reserve minutes, which soothed concerns about an earlier than expected  increase in U.S. interest rates.

Considering all this good news, investors could justifiably feel surprised — even shocked — by Wall Street’s sharp falls this week. By Thursday afternoon, the Standard & Poor’s 500 had given back its entire gain for the year, and the Nasdaq 100 gauge of leading technology stocks had suffered its biggest setback since 2011. Many market analysts interpreted the negative reaction to good news as a classic sign of a market top, warning that the uninterrupted rise in share prices that began more than five years ago is overdue for a sharp reversal.

A central banker’s ‘license to lie’

Anatole Kaletsky
Jan 30, 2014 21:43 UTC

Federal Reserve Chairman Ben Bernanke, who retires this week as the world’s most powerful central banker, cannot be trusted.

Neither can Janet Yellen, who will succeed him this weekend at the Federal Reserve.

And neither can Mark Carney, governor of the Bank of England; Mario Draghi, president of the European Central Bank, or any of their counterparts at the central banks of Turkey, Argentina, Ukraine and so on.

The many interpretations of Ben Bernanke

Anatole Kaletsky
May 23, 2013 16:05 UTC

Federal Reserve Board Chairman Ben Bernanke testifies before Congress in Washington, May 22, 2013. REUTERS/Gary Camero

On Wednesday in Washington, Federal Reserve Chairman Ben Bernanke presented congressional testimony that repeated, virtually word for word, statements about U.S. monetary policy he has been making since last September.

The Federal Reserve, Bernanke said, would continue buying $85 billion of bonds monthly until it was confident of reducing unemployment to 6.5 percent. The scale of these purchases might be increased or diminished – but only if and when such shifts were warranted by economic statistics. Now, he said, there is no case for a change in either direction.

Market euphoria misreads the signals from Brussels and Rome

Anatole Kaletsky
Apr 25, 2013 15:31 UTC

Financial markets, which balance judgments from some of the world’s most highly paid and best-informed analysts, are often uncannily right in anticipating unpredictable events, ranging from economic booms and busts to elections and terrorist attacks. But markets can sometimes can be spectacularly wrong, especially when it comes to politics. A classic case was the slump on Wall Street after last November’s election in the United States. This week’s market action in Europe may offer an even clearer example of market confusion about two fascinating but Byzantine political entities – the Italian government and the European Central Bank.

European stock markets have rebounded strongly this week in the face of deteriorating economic and financial fundamentals from across Europe on the basis of two political events: the reluctant agreement by Italy’s 87-yearold president. Giorgio Napolitano, to serve another seven-year term because nobody else could be found to do the job; and hints from ECB council members that they might vote to cut interest rates from 0.75 percent to 0.5 percent next Thursday.

Neither of these events remotely justified investors’ euphoria. The ECB case is straightforward. First, the ECB may well disappoint next week, since several influential decision makers oppose a rate cut. Second, even if the ECB does act, a quarter-point cut will do nothing for growth. Third and most importantly, such a tiny rate cut, if it happens, will simply underline the ECB’s refusal to follow the U.S. Federal Reserve, the Bank of Japan, the Bank of England and the Swiss National Bank in expanding the money supply or taking other “unconventional” measures that could potentially have a much greater financial impact than any marginal fiddling with interest rates. So much, then, for the silly idea in Europe that “bad news is good news” because economic weakness will force the ECB to cut rates.

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