Six Banks Fined $6 Billion Over Rigging of Forex Markets

Six of the world’s biggest banks will pay nearly $6 billion — bringing the total sums paid in connection with alleged forex manipulation to about $10 billion. These banks are also among the world’s biggest foreign-exchange traders. Five of them agreed to plead guilty to charges tied to a currency-rigging probe as they seek to wind down almost half a decade of enforcement actions. Separately, the Federal Reserve fined Bank of America Corp $205 million for unsound practices in foreign exchange. Citicorp, JPMorgan Chase & Co., Barclays Plc and Royal Bank of Scotland Plc agreed to plead guilty to conspiring to manipulate the price of US dollars and euros in settlements with the Department of Justice. UBS Group AG agreed to plead guilty to charges related to interest-rate manipulation. They were the first to cooperate with antitrust investigators and were granted immunity in the currency probe. Between December 2007 and January 2013, forex traders at Citi, JPMorgan, Barclays, RBS  and a few other big banks colluded by sharing proprietary information on pending client orders ahead of the 4 p.m. fix. This information sharing was allegedly done through instant-message groups – with catchy names such as “The Cartel,” “The Mafia,” and “The Bandits’ Club” – that were accessible only to a few senior traders at banks who are the most active in the forex market. The audacious nature of the dealing desks is revealed in the chatroom transcripts as one employee at Barclays remarks, […]

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The Negative Rate Mortgage Is Now A Reality

With negative interest rate policy (NIRP) raging in the eurozone and over €1.9 trillion in European government bonds trading with negative yields, many were wondering whether this generosity will spill over to other debtors. Following consecutive rate cuts during this year by the Danish Central Bank, local Danish banks — Nordea Credit, Realkredit Danmark — are now offering a mortgage with a negative interest rate! Negative interest rates aren’t a new phenomenon in Europe, but they’ve been limited to inter-bank borrowing. FT reported Ms Christiansen received a negative interest rate for her three-year loan, meaning the lender — Realkredit Danmark, a part of Danske Bank — is paying for her to borrow money. The interest rate of minus 0.0172 per cent — which equates to her receiving about DKr 7 each month from the bank — is just one sign of the “Through The Looking Glass” effects of extreme central banking measures in Scandinavia. The Scandinavian central banks are going pretty far in NIRP. Sweden’s Riksbank became the first central bank in the world to take its main policy rate — the so-called repo rate — into negative territory. Denmark’s Nationalbanken in turn cut its deposit rate — the amount it pays or in this case charges banks for placing money with it — four times at the start of this year to a world record low of minus 0.75 percent. On April 8th, Switzerland became the first country to sell 10-year […]

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Negative-Yield Bond Universe Is $2.35 Trillion!

As part of its €1.1 trillion quantitative easing plan, the European Central Bank (ECB) will buy government bonds due between two- and 30-years, including those with negative yields, President Mario Draghi said in January. The bond buying plan has left $1.9 trillion of the euro region’s government securities with negative yields. Germany sold five-year notes at an average yield of minus 0.08 percent on February 25, a euro-area record, meaning investors buying the securities will get less back than they paid when the debt matures in April 2020. By the next day, German notes with maturity out to seven years had sub-zero yields — reached minus 0.017 percent. The rates on seven other euro-area nations’ debt were also negative. The German bond markets are leading this historical phenomenon — 88 of the 346 securities in the Bloomberg Euro zone Sovereign Bond Index have negative yields. Euro-area bonds make up about 80 percent of the $2.35 trillion of negative-yielding assets in the Bloomberg Global Developed Sovereign Bond Index. The seemingly illogical willingness of investors to pay issuers to borrow their money is neither irrational nor driven by just noncommercial considerations (such as regulatory requirements or forced risk aversion). As the ECB prepares to start its own large-scale purchasing program next week, some investors believe they could make capital gains on such negative yielding investments. The ultra-low interest rate regime is likely to persist for now and this has caused challenges for banks. A growing […]

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Much-needed Correction Or Dubious Data?

India changed its gross domestic product (GDP) calculations and caught everyone by surprise on January 30th, with the revisions suggesting Asia’s third-largest economy is in much better shape than we thought it was. The government now will calculate growth based on 2011-12 market prices rather than the previous method of using 2004-05 factor costs. The changes are due to a database that includes more companies, better coverage of rural and urban government bodies, and the inclusion of taxes. Information is also included from stock brokers and exchanges, as well as mutual and pension funds and market regulators. The new methodology indicates that Indian economy surged 6.9% in the year through March 2014 instead of the previously reported 4.7%, while GDP marginally contracted to 113.5 trillion rupees ($1.83 trillion) from 113.6 trillion. The revision takes India’s growth closer to the fastest-growing major economy in the world, China’s 7.4%. Although the new method brings the Indian data in line with the International Monetary Fund (IMF) and global counterparts, the extent of upward revision is quite sharp and all future estimates have to be re-calibrated. The consequences of the inability to accurately chart a trend could be immediate. Reserve Bank of India (RBI) is meeting tomorrow to decide whether to cut rates for a second time in three weeks, had earlier predicted that inflation would stay below-target until January 2016, based on  forecast of growth at 5.5% for the current fiscal year.

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The Road To Normal Is Proving To Be Bumpy

Simon Kennedy said that stunning monetary-policy shifts in Switzerland and India sent markets on wild rides, highlighting Federal Reserve Chair Janet Yellen’s November warning that “normalization could lead to some heightened financial volatility.” Today, Reserve Bank of India (RBI) cut their key interest rate for the first time in 20 months and Swiss National Bank (SNB) abandoned a three-year-old cap on the franc’s gains. Both decisions were unscheduled and, in Switzerland’s case, unexpected. Swiss franc surged 27% against US dollar while the surprise rate cut by RBI boosted benchmark stock indices 2.6%, the biggest percentage gain since May 9th, 2014. These decisions indicate the prevailing divergence in the global economy. Central banks are no longer aligned and they are often a source of volatility. SNB dismantled the franc’s 1.20 per euro ceiling a week before the ECB’s expected announcement of quantitative easing. That move would intensify upward pressure on Swiss franc, rendering the cap untenably expensive. RBI reduced the repo rate by 25 basis points to 7.75% after weakening of inflation giving them room to support the Indian economy growing half the pace of four years ago. In the end, central banks showed that they still have the power to stun. Forward guidance has its limits as policy can shift abruptly when economic conditions change and officials still like the odd surprise. Axel Weber, former Bundesbank president and now chairman of UBS Group AG commented “Better an end with a shock, than shocks […]

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Deposit Interest Rates Going Negative

The Swiss National Bank (SNB) today imposed the negative deposit rate as the Russian financial crisis and the threat of further euro-zone stimulus heaped pressure on the franc. Switzerland normally sees money flowing into its coffers in difficult economic times. A charge of 25 basis points or one-fourth of a percentage point on sight deposits of commercial banks at the central bank, will apply as of January 22. That’s the same day as the European Central Bank’s first decision of 2015. The European Central Bank (ECB) cut a key interest rate below zero, the first major central bank to venture into negative territory. The ECB cut its deposit rate to minus 0.1% from zero on June 5, then again to minus 0.2% on September 4, when President Mario Draghi said interest rates had reached the “lower bound.” Interest rates have fallen below zero before. Negative deposit rates have been used by a handful of smaller central banks in recent years, including Sweden’s, which cut its deposit rate below zero again in July after a 14-month experiment in 2009-2010 at the height of Europe’s debt crisis. Denmark returned to a negative deposit rate in September, though the cut was aimed at protecting its currency rather than stimulating growth. U.S. Treasury securities traded at negative yields during parts of the 1930s and 1940s, and Switzerland imposed negative interest rates in the 1970s as part of capital controls. The ECB officials say more stimulus is […]

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Iraqi Bonds Gain On Maliki Resignation Optimism

Iraqi government bonds advanced, sending yields down the most in 11 months, on speculation Iraqi Prime Minister Nouri al-Maliki’s resignation will improve the country’s security situation. Maliki’s move ends a political impasse and may enable Prime Minister-designate Haidar al-Abadi to pull together a more inclusive government better able to counter Islamist militants advancing in the north. The financial markets had largely priced in this change as we witnessed a 2.5 point rally in Iraq 2028 bonds during the week. The bonds continued their impressive rally on Friday and the yield on the dollar-denominated debt maturing in January 2028 fell 27 basis points to 6.88% at 6:10 p.m. in London, the biggest decline since September 2013. The Iraqi bonds joined the continued strengthening we’ve seen elsewhere in Emerging Markets and Russia in particular. The rate decreased 61 basis points in the past five days, the first weekly retreat this month. Yields on the government’s 2028 securities have risen 59 basis points since the Islamic State militants captured the northern city of Mosul on June 10.

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Who Buys Bonds With A Negative Yield?

Bloomberg today reports that German bond gains sent the two-year rate below zero for the first time since May 2013 before the European Central Bank announces its latest decision on monetary policy today. The two-year note rate was at minus 0.002 percent, and touched minus 0.004 percent, the least since May 24, 2013. A negative yield means investors who hold a security until it matures will receive less than they paid to buy it. Another way to look at it is that Germany is not only able to borrow money from the market but they are earning a small amount of interest on top of it. This rare but realistic phenomenon is being driven by only one thing – fear. Investors in other parts of Europe are so worried about getting their money back that they are willing to pay a little for the peace of mind of knowing that they will get back their full capital later. Now one may wonder why investors in Europe are willing to pay interest on German notes/bonds when they can buy the US, UK or Australian bonds and still earn some interest and the reason is foreign exchange risk. Investors don’t want to have to worry about changes in the value of the EUR/USD or about the cost of converting their currency back into euros in the future if it means paying a small amount of interest.

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Iraqi bond: Yield Tumbled 101 bps

As per an article on Bloomberg, an unintended consequence of Iraq’s political strife is cheaper borrowing costs for the government. As per the article, the yield on Iraq’s January 2028 bond tumbled 101 basis points this year to 6.64% on May 22, within three basis points of the lowest since March 2013. The bond has returned 13% in the period, more than twice the average for dollar-denominated sovereign bonds from the Middle East’s OPEC members. Foreign currency reserves rose 33% to $88 billion in the fourth quarter from the end of 2012 after the nation surpassed Iran as OPEC’s second-biggest oil producer. An impasse over revenue-sharing between the government and Iraq’s self-ruling Kurds is among the disputes that have blocked approval of a record budget of $145.9 billion for 2014. The yield spread for Iraq’s dollar bonds over the US Treasuries has declined 112 basis points since this year’s Feb. 6 peak to 432 basis points yesterday, according to JPMorgan Chase & Co.’s EMBI Global indexes. The spread between Treasuries and Middle Eastern bonds narrowed by 48 basis points in the same period. Iraq’s spread dropped on May 12 to the lowest since August 2011. Iraq could buy back the entire bond issue at par with the revenue from 10 days of oil exports. This creates a large margin of safety. A lot can go wrong, and investors can still do very well. Global Trend The slid in bond yields is also more […]

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