Pro Perspectives 9/3/19

September 3, 2019

We start the month of September with another record low in German yields. 


It will cost you almost three-quarters of a percent to lend your money to the German government for 10-years.


Not only is the 10-year yield negative in Germany, the entire yield curve is negative.  In August, Germany sold almost a billion dollars worth of 30-year government bonds at a negative yield.  


You buy these bonds if you think paying the government to park your money is the best alternative you have (and the highest probability of seeing your money again, less the interest).  Or, you buy these bonds if you think the yields are going even deeper into negative territory (seeking a capital gain).  


With this signal of fear about the future, the ECB is under pressure to restart QE at their meeting next Thursday. 


Remember, they just quit QE back in December.  Arguably, that move, in combination with another Fed rate hike just six days later (which included the Fed's verbal commitment to QT), is what crushed stocks in December, and sent global bond yields into a death spiral.  That one-two punch from the ECB and the Fed, sent a clear message/reality check to markets that the more than $14 trillion in global liquidity that the big three central banks have pumped into the world–which promoted stability and little to no inflation–was getting sucked out.


Given the state of global government bond yields, the world has made the judgement that the central banks made a mistake exiting emergency policies.   


With that, the Fed has already reversed course of rates and the ECB is on deck to respond.  They already launched a trial balloon to prepare markets for more stimulus in the middle of last month.   Today "sources" are saying a new package is coming, to include a rate cut, guidance for "lower for longer" rates, assistance for banks to deal with negative rates, and maybe more/new asset purchases (i.e. QE).  


We've talked about the prospects of the ECB following the lead of Japan and launching a plan to outright buy stocks.  That would be the last bold move before Draghi (the architect of Europe's QE program and economic crisis management) passes the baton to Christine Lagarde in November.