Dear Mr. Armstrong,
I am really confused regarding long-term interest rates – I had thought they were controlled by the markets – but it seems at time that the central banks control them by buying the governments debt. Can you shed some light on this? Can the central banks just keep printing and buying bonds to keep their yields down or is the private market a bigger force – and if so, who in their right mind buy negative yielding debt?
Confused, and yours gratefully,
ANSWER: The central bank can control short-term rates. They are trying to control long-term buying in government debt and in theory the bank would then start to lend long-term. You have to separate government from private debt. Just as sometimes silver rallies more than gold or the other way around, the same is true between public and private debt. Despite the fact that governments are trying negative rates, the net effect has been for European banks to send the cash to their US branch and park it at the Fed. Rates are rising in the peripheral markets already.
Rates have been increasing in some countries and declining in others. Central banks cannot “control” long-term rates. All they can do is try to “influence” it by buying debt in an attempt to reduce the supply. But they cannot FIX LONG-TERM rates. That is purely a market function. Capital is running away from government debt. The bondholders have been willing to sell this to them and many are starting to shift to corporate debt. Many pensions have started that process while others have tried to buy emerging debt with higher yields.
All rates will start to pop when CONFIDENCE starts to say, “OMG!” For that, we need the next 3 elections — USA, France, Germany. Then you will see the major rates start to rise. The central banks are trapped, for they will be unable to sell the debt they have bought. This is the trap and they are rather stupid for they have no means of escape at this point.
Institutions who listen to government buy negative debt. There is now $12 trillion in globally yielding negative rates. This is absolutely insane. There will be a mad rush out and that will be the bond crash of all time.