July 24th, 2016 8:28 pm
Via the WSJ:
By Jon Sindreu
July 24, 2016 5:39 p.m. ET
Plummeting bond yields are enabling some cash-strapped governments to reduce their deficits and potentially ease austerity measures.
Spain is the trend’s latest beneficiary: It sold a three-year bond with a negative yield for the first time. That is a balm as the Spanish government is sparring with the European Union over missing its deficit targets.
Many yields have been pushed into negative territory. Earlier this month, investors paid Germany to borrow their money for 10 years. The Japanese and Swiss governments had already been able to get paid to borrow when issuing 10-year debt.
Société Générale estimates that about 40% of the reduction in budget deficits by eurozone governments between 2012 and 2015 was due to cheaper borrowing costs.
“For many countries it’s helped them to have either less austerity or to achieve their targets more easily,” said Yvan Mamalet, economist at Société Générale.
Central banks are largely responsible for borrowing costs’ march lower, as massive bond-buying programs in Europe and Japan drag down yields. Central banks across developed markets have been buying up government bonds in a bid to push yields so low that investors look to buy riskier assets. That is meant to stimulate inflation and economic growth.
The European Central Bank and Bank of Japan respectively buy €85 billion ($93.3 billion) and 9 trillion yen ($84.8 billion) worth of assets monthly, most of it government bonds.
Yields on government bonds have been pressured even further by investors seeking safe places to park their money. Yields fall as prices rise.
The British government’s total interest payments were 35% lower last year than in 2013, even though the country’s debt pile had expanded by 8%, official figures show.
“Borrowing, when the cost of money is cheap, has some great attractions,” U.K. Treasury chief Phillip Hammond told British broadcaster ITN. Still, he also said that the U.K. is “already highly indebted,” suggesting that the government isn’t leaping into more borrowing.
The U.K. government will consider how the economy is performing before deciding whether to change its spending plans in its annual autumn spending review, a British official told The Wall Street Journal.
Following last month’s vote to leave the EU, the U.K. abandoned plans to wipe out its budget deficit by 2020 amid concern that Brexit will hit its economy.
Analysts say that lower borrowing costs could be a crucial factor in whether British officials decide to borrow and spend to create extra demand in their economy.
“The timing has never been better,” said Paul Diggle, economist at Aberdeen Asset Management PLC.
The savings are also a boost to some eurozone countries as they try to meet the EU’s budget targets.
Earlier this month, EU finance ministers threatened Spain with a fine for running up a deficit of 5.1% of gross domestic product last year. The commission is demanding that figure fall below 3% this year, while Spain has projected a 3.6% deficit and is seeking more time to meet the EU’s target.
In the U.S., the drop in government borrowing costs have helped push the budget deficit down to less than 3% of GDP, where it was before the financial crisis, official figures show.
Some economists believe that the decline in yields suggests that the U.S. should consider taking on more debt to spend money on things that might boost economic growth, such as infrastructure or research and development.
Aside from lowering yields, bond-buying programs are good for government coffers for another reason: Central banks send the income they get from the bonds they buy back to their government’s treasuries. So governments are essentially paying interest to themselves.
Since firing up their bond-buying programs, the Federal Reserve and Bank of England have returned $596 billion and £36 billion ($47.2 billion) to their respective governments.
Central banks’ role in reducing borrowing costs for their governments remains controversial, with many economists arguing they should limit themselves to controlling interest rates.
Developed countries keep central banks and public treasuries strictly separated on the rationale that giving politicians access to an institution that can print money would lead to excessive inflation. Through much of the history of central banks, though, they have been more tied to financing governments than macroeconomic management.
The world’s oldest central bank, the Swedish Riksbank, was founded in 1668 as a substitute to a bank that was used by King Carl Gustav in order to finance his war with Poland. The Bank of England was created in 1694 to pay for wars against France and was in charge of managing the Treasury’s debt until 1997, when it was given full independence.
The U.S. Federal Reserve was supposed to be an exception. At its inception in 1913, it was meant to provide financial stability at arm’s length from Washington. Still, supporting the market for government debt became its primary mission less than a year later, when World War I broke out.
“Central banks are always hybrid, typically more government bank in wartime and more bankers’ bank in peacetime,” said Perry Mehrling, money and banking professor at Columbia University.
Many investors and analysts now expect the Chinese walls between central banks and treasuries could be breached again. This month, speculation has mounted that the Bank of Japan was considering a policy called “helicopter money,” by which the central bank could directly finance government spending, despite BOJ Governor Haruhiko Kuroda ruling out this possibility.
“Market enthusiasm for the idea of ‘helicopter money’ is growing,” British bank Standard Chartered said in a note to their clients Thursday. “We believe it is no longer a taboo policy option.”
—Nick Timiraos, Richard Boudreaux and Nick Winning contributed to this article.
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