QUESTION:
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,
George
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-TERMrates. 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.
…click on the above link to read the rest of the article…
