China Sells Negative Yielding Debt for the First Time


In relatively small deal, China just sold euro-denominated debt at a negative rate.

China Joins the Negative Yield Debt Club 

It's economic madness but China Borrows at Negative Rates for the First Time.

Superlow interest rates in Europe helped China to sell its first negative-yielding debt, as it raised about $4.7 billion in a three-part deal in euros.

The debt sale drew robust demand, aided by China’s rapid return to economic growth after tackling the coronavirus and the relative scarcity of Chinese bonds denominated in the common currency. 

The deal was worth €4 billion, the equivalent of $4.74 billion, and split between 5-, 10- and 15-year bonds. The 5-year bonds were priced late Wednesday to yield minus 0.152%, while the 10- and 15-year securities were sold with positive yields of 0.318% and 0.664%, respectively.

Logical World Impossibility

In the logical world this is impossible. 

It implies a negative time preference in which one would rather have 90 cents a year from now than a dollar today. 

On the greater fools theory, investors bet that central banks will continue to drive down yields and they will get even more negative.

Others find China attractive because the rate in China is less negative than euro-denominated rates in the EU.

Interest Rate Trap

Central banks that pursue this madness find themselves in a trap they do not know how to get out of.

Spotlight Japan

Japanese Real GDP vs 10-Year Yield

Neither low interest rates, nor QE, nor wasted fiscal stimulus promote growth over the long haul.

Japan tried all three for decades. The results speak for themselves, recession after recession. 

Hello Fed, Low Interest Rates Do Not Promote Growth

I discussed this recently in Hello Fed, Low Interest Rates Do Not Promote Growth.


Instead of promoting growth, artificially low interest rates promote zombification. 

Unproductive companies are artificially kept alive at the expense of more productive companies.

  1. December 16, 2017: Zombie Corporations: 10% of Companies Depend on Cheap Fed Money
  2. July 19, 2019: Zombification Perfected: Negative Yield Junk Bonds Take Hold in Europe
  3. November 18, 2019: China, like Japan in the 1990s, Will Be Dominated by Huge Zombie Banks

What Will the Fed Do?

The Fed understands the negative rate trap and it can see the problems facing the ECB and BOJ.

But the Fed may try something even worse. One possibility is direct printing, making the Fed's liabilities legal tender or a medium of exchange.

Bond Bull Lacy Hunt Warns of a Huge Monetary Risk

I commented on the legal tender possibility twice. Both are worth a review.

  1. Aug 18, 2020: Bond Bull Lacy Hunt Warns of a Huge Monetary Risk
  2. October 22, 2020: Two Inflationary Tail Risks For US Investors


Comments (18)
No. 1-8

Mnuchin to End Key Fed Emergency Programs, Limiting Biden

Mnuchin to End Key Fed Emergency Programs, Limiting Biden
Mnuchin to End Key Fed Emergency Programs, Limiting Biden

WASHINGTON -- Treasury Secretary Steven Mnuchin said he does not plan to extend several key emergency lending programs beyond the end of the year and asked the Federal Reserve to return the money supporting them, a decision that could hinder President-elect Joe Biden's ability to use the central bank's vast powers to cushion the economic fallout from the virus.Mnuchin said Thursday that he would not continue Fed programs, including ones that support the markets for corporate bonds and municipal debt and one that extends loans to mid-sized businesses. The emergency efforts expire at the end of 2020, but investors had expected some or all of them to be kept operational as the virus continues to pose economic risks.The pandemic-era programs are run by the Fed but use Treasury money to insure against losses. They have provided an important backstop that has calmed critical markets since the coronavirus took hold in March. Removing them could leave significant corners of the financial world vulnerable to the type of volatility that cascaded through the system as virus fears mounted in the spring.Sign up for The Morning newsletter from the New York TimesBy asking the Fed to return unused funds, Mnuchin could prevent Biden's incoming Treasury secretary from quickly restarting the efforts at scale in 2021."The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy," the central bank said in a statement.The emergency programs were backed by $454 billion that Congress appropriated in March as part of a broader pandemic response package. Because of the way the Fed's emergency lending powers work, Jerome Powell, the Fed chair, needs the Treasury secretary's signoff to make major changes to the programs' terms. Extending the end date counts as one of those changes that need approval.The decision to close the various programs and remove the funding appeared to come as a surprise to the Fed, which received a letter announcing the Treasury's desire to claw the money back Thursday afternoon."I am requesting that the Federal Reserve return the unused funds to the Treasury," Mnuchin said in the letter. He noted that he had been "personally involved in drafting the relevant part of the legislation" and believed it was Congress' intent that the programs stop at the end of the year.Earlier this month, Powell said the central bank and Treasury were just beginning to discuss whether to extend the programs.Mnuchin did agree to extend other emergency loan programs that are not backed by the congressional appropriation, including ones that service the short-term market for corporate debt, one for money market funds, and one that backstops government small-business loans.The Fed avoids taking credit losses when extending loans, and throughout the pandemic crisis it has asked for Treasury backup for its riskier programs. If it returns any unused money that the Treasury has already dedicated to support the programs, as Mnuchin requested, the Biden administration will have less financial backup to restart the programs.That's because the congressional appropriation -- $195 billion of which has been earmarked to specific Fed programs -- cannot be used to make new loans after the end of the year.But while the law prohibits the Treasury from putting money into the Fed's facilities after 2020, it does not obviously prevent the Fed from using already-earmarked Treasury funding to insure its own loans and bond purchases."The loans, loan guarantees and investing that the Treasury does is the applicable language," said Peter Conti-Brown, a lawyer and Fed historian at the University of Pennsylvania. He said that while it may be possible to read the law as preventing new Fed loans, that is not the "obvious reading."The Fed and the next Treasury secretary do have an alternative to continue the programs: They could use money in the Treasury's Exchange Stabilization Fund, which still contains about $74 billion in uncommitted funds, to back the programs. It is unclear exactly how much of the fund can be used, but the programs have not to date needed substantial capacity.Mnuchin's move could leave the government with fewer options to help the economy just as the new administration takes office."Treasury is right that a limited set of objectives have been achieved in terms of stabilizing bond markets," Jason Furman, a prominent Democratic economist, said on Twitter. "But what is the downside to continuing them as insurance against worse developments?"Many of the Fed's programs, including one that buys state and local debt and another that encourages banks to lend to small and mid-sized businesses, have been lightly used. But that is because they were designed as backstops -- meaning that borrowers would likely only use them when times are bad.And it is Mnuchin himself who has been conservative in setting the program's terms. With a more permissive head at the Treasury, the terms could have been made more generous.In fact, Democrats had been eyeing both the municipal bond-buying program and the Main Street lending effort for small and medium-sized businesses as potential backup options if it proves difficult to pass additional government relief. Without them, businesses and state and local governments would have one less potential source of help.With coronavirus cases on the rise, the economy may sour again, making the programs more necessary. As recently as Tuesday, Powell warned of the potential for economic scarring and said that the economic recovery had "a long way to go." But Treasury officials have expressed optimism that the economy is poised for a steady rebound and that the likely rollout of a vaccine by the end of the year further improves the economic picture.Sen. Patrick Toomey, R-Pa., who had been pushing Mnuchin to end the programs, applauded the decision."These temporary facilities helped to both normalize markets and produce record levels of liquidity," Toomey said in a statement. "Congress' intent was clear: These facilities were to be temporary, to provide liquidity, and to cease operations by the end of 2020."Treasury's move prompted concern from Democrats, some of whom said the Fed should simply refuse to return the money -- a route it is unlikely to take.Bharat Ramamurti, a Democrat who sits on the congressional oversight body in charge of reviewing the various Fed and Treasury programs, suggested on Twitter that, legally, the Fed was under no obligation to give back the funds."Under its contracts with Treasury, the Fed can and should reject the request," he said. "While Secretary Mnuchin claims congressional intent was to halt all new loans at year-end, the text of the CARES Act doesn't say that. At a minimum, the Fed can continue to make loans using the $195 billion in equity Treasury has already committed."This article originally appeared in The New York Times.(C) 2020 The New York Times Company


What are China doing with the Euros or have they swapped them into dollars I wonder.

"In the logical world this is impossible. 

It implies a negative time preference in which one would rather have 90 cents a year from now than a dollar today. "

No this is not impossible in the logical work. We regularly make intertemporal choices regarding expenditure/consumption. Whether it is an agrarian civilization farmer storing grain or a worker saving for retirement.

If you consider currency (physical or not) as something with zero risk and zero storage costs then yes this provides a lower bound for the interest rate. But the reality is that there is a risk and a storage cost.

There are a whole host of problems with Europe and much of the world's monetarily policy that has lead us here. But from an economic perspective, negative interest rates are not illogical.


How many of us now feel like strangers on this planet?


Theoretically negative interest rate will blew away the debt as inflation rate is higher than interest. But Japan said it didn't work.


who would feel comfortable owning a Chinese digital currency?

Never Sir Ender
Never Sir Ender

This isn't economics, it's Left-ism and Mish should welcome it since he thinks so little of Trump and thinks Biden's Globalism is the answer.

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