Fed is caught between rock and hard place right now. Banks lend on spread. If the fed raises short rates, it hurts economy and ten yr rates comes down, decreasing spread. If fed lowers rates and goes nirp, it drives investors to ten yr to try to get a yield, also decreasing spread. Business cycle-1 Central Bank-0
Again it's counterintuitive that raising short rates causes ten year rates to come down, so I don't think it's something you can just throw out without explaining why. Correlation is not causation, and I don't even see a correlation argument from the graph above which is talking about the 2 year/10 year spread not negative interest rates. This whole argument has me wanting to scream why, why, why? No criticism of the posters, I am honestly looking forward to you showing me why and I haven't formed an opinion one way or the other, but I do see a long line of unsupported assertions everywhere on this so I'm longing for some actual explanations.
You missed the part I claimed business cycle is beating central bank. Demand for loans plays a part, too. If loan demand drives long rates up, that's good. If central bank dumping trillions of bonds drives long rates up, that does nothing for loan demand.
Because they make no money on the lending. In fact, as is happening in Denmark, they actually have to pay interest on loans they make.
When a Danish company goes to borrow money from a bank, they still pay interest to the bank, right? The bank has to pay to stash their money with the central bank, but they make money if they lend it out. Hence they're incentivized to lend rather than stash, which is the desired policy outcome negative interest rates? I'm still not getting something here I'm afraid.
Do you want to be a bond holder or a bag holder? Tomorrows higher yielding bond/note trashes the value of todays lower yielding note/bond. The fed raising short term rates is forcing sales of short term note bag holders. Those who own yetserdays lower yielding note see its falling price and dump it . Inflation (higher rates) are a bond holders nightmare. So, in the above environment , do you want to shift to equities. The thrill is gone. The fed is late but is removing the punchbowl, miscalculating, and is sure to bring on a recesssion. Flight/relative safety is a component and aligns with economic fundamentals. The oncoming recession and present day fed tightening is sure to overshoot and kill all inflation. Yields further out .....10 to 20 etc.. respond to low inflation expectations with a note/bond rally. A bond holders dream,falling interest rates (no inflation/deflation) in the instrument they own.. Capital appreciation swamping the falling yield. I dont know, but I assume big money mandated to fixed income must slide thier maturities back and forth say, between the 2 and 10 year note. Inflation, time, and default are the cheif risks and a relative decision is made between the 2 and 10 year. Recent history, going back to Greenspan(Greenspan conundrum) highlights what happens further oit on the curve can frustrate the fed. Wasnt it just last year Yellin declared the risk premia( yield beyond fundamentals) was to low And that rates in that part of the curve could increase dramatically with US taper and divergent monetary policy. That has not playedout at all. Remember December, the rate hike, things were not obvious as hindsight is now. There was a big discounting of the feds move in the 1,3,6 month notes, eurodollar futures and fed funds futures. These pretty much topped with the fed action/hike, sold off a bit and rallied furiously with oil/China/fed fading. So, of course there is potentially some confusion possible where the fed raises rate and entire curve rallies.
No, that's just it. When someone takes a mortgage from the bank, the bank pays them a slight amount of interest on the mortgage. You still have the mortgage payment to make, but the interest portion of the payment is actually a credit to you, from the bank. http://www.ft.com/intl/cms/s/0/7f4e2f4c-dde3-11e4-9d29-00144feab7de.html Given this, why would the bank want to lend out money?
When/if interest rates go negative, probably ever so slowly, i wonderer if anything will change Trading eurodollar futures, ZT and ZN. Probably wouldnt notice when this Happens. NIRP must somewhat discounted already. I am very interested in the effect of NIRP on residential real estate values.