http://www.afr.com/news/world/asia/zhou-says-china-has-room-for-monetary-easing-may-not-use-it-20150418-1mo4ek Zhou Says China Has Room for Monetary Easing; May Not Use It April 18, 2015 0 Share 0 Pin 0 Share 0 Share Source: Bloomberg Markets China’s central bank Governor Zhou Xiaochuan said the world’s second-largest economy has scope compared with other nations to ease its monetary policies though won’t necessarily take advantage of it. “We have room in the reserve ratio and our interest rates are not zero yet,” Zhou, 67, said in a brief interview Saturday in Washington, where he was attending the International Monetary Fund’s spring meetings. “There is definitely room. But we need to adjust carefully. It doesn’t mean we will have to utilize it or fully utilize the room.” Banks including Macquarie Group Ltd. and HSBC Holdings Plc flagged the need for further stimulus after China’s economy expanded last quarter at the slowest pace since 2009 and industrial-production gains in March were the slowest since November 2008. An economy-wide inflation indicator turned negative last quarter for the first time since 2009, suggesting room for easing. Premier Li Keqiang last month said policy makers will step in to support the economy if jobs and wages are hurt by the slowdown, while Zhou previously said the nation needs to be vigilant about deflation risks and policy makers have “room to act.” The People’s Bank of China made its first interest-rate cut in two years in November and followed with another reduction announced in February, with the one-year lending rate now at 5.35 percent and one-year deposit rate at 2.5 percent. It also lowered banks’ reserve-ratio requirements in February. China is battling a property slump, excess industrial capacity, local-government debt and capital outflows, with the economy last year expanding at the slowest pace since 1990. The nation is among at least 30 countries that have loosened monetary policy this year as lower commodity prices give room to stimulate. Gross domestic product rose 7 percent in the three months through March from a year earlier, while industrial production last month increased by 5.6 percent, after a 6.8 percent rise in the first two months of the year. In a statement at the meetings in Washington taking place from Friday to Sunday, Zhou said that while China’s economic expansion is slowing, it’s still within a “reasonable range” and employment growth remains stable. He reiterated that China will pursue “prudent” monetary policy and said it will adjust “adaptively” according to the economy and inflation, according to the statement posted on the PBOC’s website. One hurdle that may curb the extent of any monetary stimulus is China’s surging stock market, which took off after the central bank cut interest rates in November. Another may be reticence to reignite debt risks and a repeat of the 2009 stimulus binge. Zhou and the Chinese government have been pressing the IMF to include the yuan in its Special Drawing Rights basket of currencies regarded as global reserve currencies. IMF Managing Director Christine Lagarde has said that “we welcome and share this objective.” Zhou, in Saturday’s interview, declined to speculate on when the yuan, also called the renminbi, would be added to the basket. The IMF this week indicated it may be abandoning its long-held view that the Chinese exchange rate is undervalued . “The market should be the judge of the renminbi’s value rather than us,” Zhou said. Source: Bloomberg Markets
Foreword Preface Acknowledgments 1 Synopsis 2 Introduction to finance 3 Derivative securities 4 Hamiltonians and stock options 5 Path integrals and stock options 6 Stochastic interest rates' Hamiltonians and path integrals 7 Quantum field theory of forward interest rates 8 Empirical forward interest rates and field theory models 9 Field theory of Treasury Bonds' derivatives and hedging 10 Field theory Hamiltonian of forward interest rates 11 Conclusions Brief glossary of financial terms Brief glossary of physics terms List of main symbols References Index
he term “ interest rate ” is one of the most commonly used phrases in consumer finance and fixed income investments . Of course, there are several types of interest rates: real, nominal, effective, annual and so on. The differences between the various types of rates, such as nominal and real, are based on several key economic factors. But while these technical variables may seem trivial to the uneducated, lending institutions and retailers have been taking advantage of the public’s general ignorance of these distinctions to rake in hundreds of billions of dollars over the years. Those who understand the difference between nominal and real interest rates have therefore taken a major step toward becoming smarter consumers and investors. Nominal Interest Rate The nominal interest rate is conceptually the simplest type of interest rate. It is quite simply the stated interest rate of a given bond or loan. This type of interest rate is referred to as the coupon rate for fixed income investments, as it is the interest rate guaranteed by the issuer that was traditionally stamped on the coupons that were redeemed by the bondholders. The nominal interest rateis in essence the actual monetary price that borrowers pay to lenders to use their money. If the nominal rate on a loan is 5%, then borrowers can expect to pay $5 of interest for every $100 loaned to them. Real Interest Rate The real interest rate is slightly more complex than the nominal rate but still fairly simple. The nominal interest rate doesn’t tell the whole story, because inflationreduces the lender's or investor’s purchasing power so that they cannot buy the same amount of goods or services at payoff or maturity with a given amount of money as they can now. The real interest rate is so named because it states the “real” rate that the lender or investor receives after inflation is factored in ; that is, the interestrate that exceeds the inflation rate. If a bond that compounds annually has a 6% nominal yield and the inflation rate is 4%, then the real rate of interest is only 2%. The real rate of interest could be said to be the actual mathematical rate at which investors and lenders are increasing their purchasing power with their bonds and loans. It is actually possible for real interest rates to be negative if the inflation rate exceeds the nominal rate of an investment. For example, a bond with a 3% nominal rate will have a real interest rate of -1% if the inflation rate is 4%. A comparison of real and nominal interest rates can therefore be summed up in this equation: Nominal interest rate – Inflation = Real interest rate Several economic stipulations can be derived from this formula that lenders, borrowers and investors can use to make more informed financial decisions. Real interest rates can not only be positive or negative, but can also be higher or lower than nominal rates. Nominal interest rates will exceed real rates when the inflation rate is a positive number (as it usually is). But real rates can also exceed nominal rates during deflation periods. A hypothesis maintains that the inflation rate moves in tandem with nominal interest rates over time, which means that real interest rates become stable over longer time periods. Investors with longer time horizons may, therefore, be able to more accurately assess their investment returns on an inflation-adjusted basis. Effective Interest Rate One other type of interest rate that investors and borrowers should know is called the effective rate, which takes the power of compounding into account . For example, if a bond pays 6% on an annual basis and compounds semiannually, then an investor who invests $1,000 in this bond will receive $30 of interest after the first 6 months ($1,000 x .03), and $30.90 of interest after the next 6 months ($1,030 x .03). The investor received a total of $60.90 for the year, which means that while the nominal rate was 6%, the effective rate was 6.09%. Mathematically speaking, the difference between the nominal and effective rates increases with the number of compounding periods within a specific time period. Note that the rules pertaining to how the AER on a financial product is calculated and advertised are less stringent than for the annual percentage rate (APR). Applications The chief advantage to knowing the difference between nominal, real and effective rates is that it allows consumers to make better decisions about their loans and investments. A loan with frequent compounding periods will be more expensive than one that compounds annually. A bond that only pays a 1% real interest rate may not be worth investors' time if they seek to grow their assets over time. These rates effectively reveal the true return that will be posted by a fixed-income investment and the true cost of borrowing for an individual or business. Investors who seek protection from inflation in the fixed-income arena can look to instruments such as Treasury Inflation Protected Securities (TIPS), which pay an interestrate that is indexed to inflation. In addition, mutual funds invest in bonds, mortgages and senior secured loans that pay floating interest rates that periodically adjust with current rates. Conclusion Interest rates can be broken down into several subcategories that incorporate various factors such as inflation. Smart investors know to look beyond the nominal or coupon rate of a bond or loan to see whether it really fits their investment objectives. Consult your financial advisor if you need professional advice on interest rates and investments that keep up with inflation.
Once a bond is issued the issuing corporation must pay to the bondholders the bond's stated interest for the life of the bond. While the bond's stated interest rate will not change, the market interest rate will be constantly changing due to global events, perceptions about inflation, and many other factors which occur both inside and outside of the corporation. The following terms are often used to mean market interest rate: effective interest rate yield to maturity discount rate desired rate When Market Interest Rates Increase Market interest rates are likely to increase when bond investors believe that inflation will occur. As a result, bond investors will demand to earn higher interest rates. The investors fear that when their bond investment matures, they will be repaid with dollars of significantly less purchasing power. Let's examine the effects of higher market interest rates on an existing bond by first assuming that a corporation issued a 9% $100,000 bond when the market interest rate was also 9%. Since the bond's stated interest rate of 9% was the same as the market interest rate of 9%, the bond should have sold for $100,000. Next, let's assume that after the bond had been sold to investors, the market interest rate increased to 10%. The issuing corporation is required to pay only $4,500 of interest every six months as promised in its bond agreement ($100,000 x 9% x 6/12) and the bondholder is required to accept $4,500 every six months. However, the market will demand that new bonds of $100,000 pay $5,000 every six months (market interest rate of 10% x $100,000 x 6/12 of a year). The existing bond's semiannual interest of $4,500 is $500 less than the interest required from a new bond. Obviously the existing bond paying 9% interest in a market that requires 10% will see its value decline. Here's a Tip An existing bond's market value will decrease when the market interest rates increase .The reason is that an existing bond's fixed interest payments are smaller than the interest payments now demanded by the market. When Market Interest Rates Decrease Market interest rates are likely to decrease when there is a slowdown in economic activity. In other words, the loss of purchasing power due to inflation is reduced and therefore the risk of owning a bond is reduced. Let's examine the effect of a decrease in the market interest rates. First, let's assume that a corporation issued a 9% $100,000 bond when the market interest rate was also 9% and therefore the bond sold for its face value of $100,000. Next, let's assume that after the bond had been sold to investors, the market interest rate decreased to 8%. The corporation must continue to pay $4,500 of interest every six months as promised in its bond agreement ($100,000 x 9% x 6/12) and the bondholder will receive $4,500 every six months. Since the market is now demanding only $4,000 every six months (market interest rate of 8% x $100,000 x 6/12 of a year) and the existing bond is paying $4,500, the existing bond will become more valuable. In other words, the additional $500 every six months for the life of the 9% bond will mean the bond will have a market value that is greater than $100,000. Here's a Tip An existing bond's market value will increase when the market interest rates decrease . An existing bond becomes more valuable because its fixed interest payments are larger than the interest payments currently demanded by the market. Relationship Between Market Interest Rates and a Bond's Market Value As we had seen, the market value of an existing bond will move in the opposite direction of the change in market interest rates. When market interest rates increase, the market value of an existing bond decreases. When market interest rates decrease, the market value of an existing bond increases. The relationship between market interest rates and the market value of a bond is referred to as an inverse relationship. Perhaps you have heard or read financial news that stated "Bond prices and bond yields move in opposite directions" or "Bond prices rallied, lowering their yield..." or "The rise in interest rates caused the price of bonds to fall." If you were the treasurer of a large corporation and could predict interest rates, you would... Issue bonds prior to market interest rates increasing in order to lock-in smaller interest payments. If you were an investor and could predict interest rates, you would... Purchase bonds prior to market interest rates dropping . You would do this in order to receive the relatively high current interest amounts for the life of the bonds. (However, be aware that bonds are often callable by the issuer.) Sell bonds that you own before market interest rates rise . You would do this because you don't want to be locked-in to your bond's current interest amounts when higher rates and amounts will be available soon. 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Mortgage Applications Have Biggest May Collapse Since Financial Crisis Submitted by Tyler Durden on 05/22/2013 12:58 -0400 Ben Bernanke Exchange Traded Fund recovery It seems that the recent rise in interest rates, instead of the typical (pre-depression) behavioral tendency to make people nervous and rush to lock in low rates , has once again stalled any hope of an organic housing recovery occurring. While the reams of hard data show that the housing recovery remains a fast-money investment-driven enigma ( here , here , and here ) - as opposed to real confidence-driven house-buying; we are still told day after day that housing is the backbone of the economy (despite construction jobs languishing and affordability plunging again). The fact of the matter is that the last 2 weeks have seen mortgage applications plunge at their fastest rate for this time of year (a typically busy time) since the financial crisis began . But that doesn't matter because housing must be recovering because the homebuilder ETF is up 2% today... January and February we saw the rate rises (blue line dropping) spark a renewed (more behaviorally normal) interest in locking in low rates and buying... but since then the relationshio has invferted once again as the Bernanke put on bonds has now found its way into the real world. The last 2 weeks have seen rates rise and mortgage apps plunge... at the fastest rate for this time of year since the crisis began... What could possibly go wrong? Charts: Bloomberg Average: 4 Your rating: None Average: 4 ( 7 votes) Tweet - advertisements - VectorVest Stock Analysis. Find out Whether a Stock is a Buy, Sell or Hold. Get your Free Stock Analysis simply by clicking here! Login or register to post comments 10635 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: 2012 Year In Review - Free Markets, Rule of Law, And Other Urban Legends David Stockman On The Fed's Path Of Destruction Why The UK Trail Of The MF Global Collapse May Have "Apocalyptic" Consequences For The Eurozone, Canadian Banks, Jefferies And Everyone Else No Hints Of QE In Latest Bernanke Word Cloud "The Lunatics Have Taken Over The Madhouse…..Yet Again!"
So You Want To Short The Student Loan Bubble? Now You Can Submitted by Tyler Durden on 03/03/2013 14:44 -0500 Ben Bernanke Ben Bernanke Goldman Sachs goldman sachs Lloyd Blankfein McDonalds Monetization New Century New Normal Primary Market Securities and Exchange Commission Student Loans Even as the gargantuan $1+ trillion student debt load has been the bubbly elephant in the room that few are still willing to talk about (as the ease of obtaining very fungible loans, with ultra-low interest rates, have become the primary source of lifestyle funding for a wide swath of Americans who are rotating out of high yielding credit cards into this latest Uncle Sam subsidy, and is thus just one more aspect of the status quo perpetuation), there have been until now zero opportunities for a the proverbial highly convex "ABX" short in the student debt space. This of course is the trade that was put on by those who sensed the subprime bubble is about to pop in early/mid 2007 and made billions as the yield chasers were summarily punished one by one as first New Century blew up, and then everyone else. Yet while one was able to buy synthetic "hedge" exposure with limited downside and unlimited upside (by shorting synthetic index spreads) in subprime, so far the only way to be bearish on student debt has been to short the equity of various private sector lenders - a trade with very limited upside and unlimited downside, and which in the current idiotic New Normal is more likely to leave one insolvent and crushed in a smoldering heap of margin calls following yet another epic short squeeze as GETCO's stop hunting algo run amok. This may be about to change. As WSJ reports , SecondMarket Holdings, the private-market securities trading firm best known for allowing numerous overzealous fans to buy FaceBook at moronic valuations, on Monday "will roll out a platform allowing lenders to issue securities backed by student loans directly to investors." Why is SecondMarket doing this? The same reason Lloyd Blankfein was selling Abacus (and all those other synthetic MBS CDOs) to clueless yield chasers all across Europe and Asia: yield chasing and career risk. The justification is also the same: making a market. The move is driven mainly by investors' growing appetite for student loans, said Barry Silbert, founder and chief executive of SecondMarket. "The catalyst for this new suite of services is investor demand," said Mr. Silbert. " At the end of the day, investors are yield searching." And just as Paulson was able to coordinate with other sellers of synthetic exposure and have a bearish bet already set in the primary market following collusion with Goldman even before breaking for trading, so we are confident that enterprising packagers of securities will be just as capable in tranching various student loan packets into securitized layers with the assistance of SecondMarket, and offload those with highest risk to those with the most aggressive career risk-for-yield chasing fulcrum points. Investors registered through SecondMarket already can trade student-loan securities they hold in their portfolios, said Mr. Silbert. Since 2008, about $6 billion worth has traded on the exchange, he said. The new platform will allow lenders to issue securities directly to SecondMarket's base of more than 100,000 investors, including institutions and affluent individuals who qualify as so-called accredited investors by the U.S. Securities and Exchange Commission. Issuers will be able to sell securities backed by private student loans, which aren't guaranteed by the federal government, as well as older federally backed student loans known as Federal Family Education Loan Program (FFELP) loans. They also will be able to distribute servicing reports through the new platform, said Mr. Silbert. Educational Funding of the South Inc., or EdSouth, and another lender have signed up to use the platform, according to SecondMarket. Edsouth, which typically buys student loans from other lenders, has used SecondMarket to trade student-loan backed securities in the past, said President and Chief Executive John Arnold. The ability to issue securities piqued his interest, he said: "Any opportunity for capital, you'd have to be looking at." And while some will be furious at what SecondMarket is doing, we applaud it as for the first time there will be a real chance for price discovery and crossing bids and asks in this latest debt bubble. After all, they are merely doing what Goldman Sachs called "making markets" which in retrospect merely allowed the subprime bubble to pop faster than it would have otherwise. Which in this day and age of one-way bets in everything is to be applauded. Of course, all that betting against the student debt bubble - which is merely one more way of "fighting the Fed" - will do is crash it promptly, only to see it reincaranted in the form of the latest Ben Bernanke monetization program (QEternity+2.718) which will be launched after this one fails to take the DJIA to 32,000. The key, as always, will be about timing. Those who get in just right, will be able to retire promptly. Everyone else will be sweeping their local McDonalds. Average: 5 Your rating: None Average: 5 ( 23 votes) Tweet Login or register to post comments 15083 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Taibbi: "Goldman Raped The Taxpayer, And Raped Their Clients" AIG: Collusion Of Epic Proportions Between Goldman's US Treasury Branch And Goldman Sachs Proper Janet Tavakoli Retracts Her Apology To Goldman Sachs, Calls For More Regulation Of The Government Backstopped Hedge Fund Additional Perspectives On The AIG Fiasco 2012 Year In Review - Free Markets, Rule of Law, And Other Urban Legends
Visualizing The Impotence Of Bernanke's Wealth Transmission Channel Submitted by Tyler Durden on 11/11/2012 13:39 -0500 We have discussed the apparent (though anecdotal) divergence between refinancing rates and interest rates a number of times. Furthermore, we have exclaimed at the significant drop in refi rates since QE3 (following the initial spike) noting the unintended consequence that US households are increasingly realizing that rates will never be allowed to rise and so every rate rise is not a signal to rush into refinancing but instead a signal to pause for lower rates . The chart below is somewhat surprising in its clarity as Goldman Sachs note that despite record low mortgage rates, borrowers are refinancing at a rate of just 20-30% per year - far lower than prepayment speeds we would expect. The great majority of 'in the money' mortgages are not being refinanced and while we suggest this is the unintended Bernanke conditioning, Goldman also opines that industry capacity and underwriting standards on the supply side; and consumer awareness and household behavior on the demand side. Via Goldman Sachs: I n normal times, borrowers with high credit quality would have refinanced as soon as mortgage interest rates declined. The chart above shows that this is largely the case before 2009 for Fannie Mae 30-year fixed rate mortgages. The percent of loans that are “in-the-money” for refinancing (defined as the borrower’s mortgage rate being at least 100bps above the market rate) is highly correlated with the subsequent prepayment speeds. However, this relationship broke down in 2008. Nearly 80% of outstanding Fannie Mae 30-year fixed rate mortgages are currently in-the-money for refinancing, but the actual prepayment speeds are much lower than what the historical experience would predict. Why aren’t more borrowers, especially those with stellar credit quality, taking advantage of today’s low mortgage interest rates and refinancing? On the supply side , one obvious suspect is the fact that industry origination capacity is constrained. The capacity constraints are a symptom of both substantial industry contraction as well as uncertainties related to reps and warranties exposure, the future of the regulatory landscape, and the outlook for housing and economy. Nevertheless, capacity constraints imply tight lending standards and less refinancing originations. This is consistent with our finding that borrowers with the highest FICO and lowest LTV are prepaying relatively faster today. Due to the tightness of industry constraints, today’s mortgage lenders are doing less advertising, marketing, and outreaching to encourage refinancing. This is consistent with our finding that the baseline prepayment speeds of all mortgages are lower than it was in 2003. On the demand side , we are harder pressed to think of reasons why borrowers, especially those with good credit and sufficient home equity, are not refinancing. One possibility is that many borrowers are not aware of how much the market rate has declined . Another possibility is that borrowers may think that lending standards are so tight today that they would be denied of refinancing, or that the process would be too much an ordeal. Lastly, household behavior such as inertia and procrastination that have been documented in the academic literature may be at play in the mortgage market, especially with industry solicitations having dropped off so substantially . It would seem - once again - that the so-called raison d'etre for QE3 is entirely broken, whether easing to ZIRP of LSAP, Bernanke's wealth-building transmission channel via housing is entirely broken ... and critically it is the banks once again that both benefit from the front-running capability as well as becoming the plug in the pipeline... Average: 4.375 Your rating: None Average: 4.4 ( 8 votes) Tweet Login or register to post comments 7434 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: QA with Alan Boyce: Freddie Mac and Inverse Floaters Pimco Borrows A Record $88 Billion To Bet On Fed's Upcoming MBS Monetization Obama Bluffs on ReFi? Mortgage Refinancing And The Fed's Perverse Incentives Fed Unintended Consequence #267435: Homeowners Front-Running QE By Not Refinancing
Jim Trippon on June 11, 2012: China’s central bank, The People’s Bank of China, cut the one-year borrowing interest rate 25 basis points, from 6.56 percent to 6.31 percent, on Thursday, June 7th. Along with this cut, the central bank cut the one year deposit rate also by 25 basis points, to 3.25 percent. China’s policy makers had been easing with other measures, but had thus far resisted moving the benchmark interest rate. This was the first rate cut since 2008, during the global financial crisis. The rate cut was initially viewed with optimism by investors, but second thoughts about the move foreshadowing worsening data overcame this initial hope. The rate cut was considered a surprise mostly because China’s policy makers hadn’t talked about such a move, but more so because the talk from Chinese leadership had been about fiscal measures with hints of other more pressing monetary concerns, chiefly money supply, along with other indications of concern over credit availability. Still, the benchmark interest rate cut was always there in the policy makers’ bag of remedies, and Beijing made it clear they were not going to sit idly by if the economic data continued to worsen. A Global Indicator? Many observers took the China’s interest rate cut as a sign that more– and major– stimulus moves would be on the way from the world’s leading economies. The pall which Europe has cast over global growth remains a factor not only in slowing the world’s economies, but the growing pessimism about whether the EU will be able to successfully restrict the damage from its failing member economies, and the possible drastic measures it may need to enact to save them, is having its effect on global investor sentiment as well. China isn’t immune to this, either. The Asian markets were in the worry mode about China, the bellwether economy in their region, while global observers awaited May economic data for China. Where Is Inflation? April inflation was 3.4 percent, and May data was expected to show 3.2 percent inflation in China. Although those outside China often misread the actions and intentions of Beijing’s policy makers, the expectations that observers had that China was still concerned with inflation, which it has largely successfully battled, were based on signals from China’s leadership itself. The specter of a sudden re-ignition of too-rapid growth has been on the minds of policy makers, thus they didn’t broadcast anything about a coming benchmark rate cut. Given the experience of inflation that occurred coming out of the global recession of 2008 and 2009, this fear seemed reasonable by Beijing. So while observers were duly surprised by the rate cut, it’s assured that the cut isn’t something the policy makers entered into lightly. A lower consumer price index in the coming months was no doubt anticipated by Chinese leadership, which would presage further slowing. China, despite what its critics maintain, has tried to get in front of recent economic developments yet without overreacting. In addition to the rate cut, the central bank has instituted a relaxing of the banking rules to allow the banks greater autonomy and flexibility in determining lending and deposit rates. This will allow the banks to be more competitive, a long-term structural change sought by Beijing. Growth Expectations Data soon to be released is expected to show the sixth consecutive quarter of contracting growth for China’s GDP. A Reuters poll of analysts came up with a forecast of 7.9 percent for the second quarter. Although this is a relatively weak number for China, given its 10 percent and 9 percent annual GDP growth rates for the last couple of years, it still stands in stark contrast to the developed world’s meager growth of 1 percent or 2 percent in the US, and the negative growth or recession underway in Europe. The moves China is making on the interest rate front may shore up growth, especially as we move through the year, to keep the annual GDP growth rate from actually falling much below 8 percent On The Horizon Beijing is at least both vigilant and active concerning policy measures. It should be pointed out that China doesn’t have the impediment of having to clear its decisions within a contentious framework of several competing members, as the EU does. That said, critics have underestimated just how proactive on economic policy China can, and has demonstrated, it will be. Related: Vanguard Emerging Markets ETF (NYSEARCA:VWO), ProShares Ultra Short FTSE/Xinhua China 25 ETF (NYSEARCA:FXP), iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI), iShares MSCI Emerging Markets Index (NYSEARCA:EEM), Vanguard Total Stock Market ETF (NYSEARCA:VTI).
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