Saturday, September 6, 2014

ECB and US Treasury Bonds

ECB cuts rates to ward off euro zone deflation threat

(Reuters) - The European Central Bank cut interest rates to new record lows on Thursday, unexpectedly lowering borrowing costs to try to lift inflation from rock-bottom levels and support the stagnating euro zone economy.

The ECB cut its main refinancing rate to 0.05 percent from 0.15 percent. ECB President Mario Draghi had said after the ECB's last rate cut in June that "for all the practical purposes, we have reached the lower bound".

In a landmark speech on Aug. 22, however, Draghi said indications from financial markets showed inflation expectations "exhibited significant declines at all horizons" in August.

Euro zone inflation slowed to 0.3 percent last month, sinking deeper below the ECB's target of just under 2 percent and raising the specter of deflation in the euro zone.

On Thursday, the ECB also said it had lowered the rate on bank overnight deposits to -0.20 percent, which means banks pay to park funds at the central bank, and cut its marginal lending facility - or emergency borrowing rate - to 0.30 percent.

Markets now turn their attention to ECB President Mario Draghi's 1230 GMT (0930 EDT) news conference, at which he is expected to give a more detailed explanation of the ECB's decision.


European Central Bank and US Treasury Bonds - Comment

Note the refinancing rate of 0.05% and the overnight deposit rate of -0.20%. Imagine losing 0.2% on your money for a deposit. As interest rates are reduced in Europe the interest rate on bonds also goes down. This makes the interest rate of the US Treasury Bonds look attractive. The net effect is money flowing from Europe to the US that offsets the action of the Federal Reserve.

The bottom line is as long as the ECB is keeping interest rates low, US Treasury Bond interest rates will stay low. In the future when ECB policy change and interest rates start to rise the impact will be that US Treasury Bond interest rates will rise.


Math Exercise

Rugs or Miles
Are their more square inches in a carpet 15 yards by 5 yards or feet in a 20-mile run?

ANSWER - Feet in a 20 mile run.

There are 12 inches in a foot, and 1,760 yards in a mile.  There are 105,600 feet in a 20-mile run.  There are 97,200 square inches in a carpet 15 yards by 5 yards.
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My Bathtub
My bathtub has two water faucets, a drain, plus a leak.  The cold-water faucet, by itself, fills the tub in 20 minutes.  The hot water faucet, by itself, fills the tub in 30 minutes.  With both faucets turned off the drain can empty the tub in 16 minutes.  The leak, by itself, will empty a full tub in 2 hours.  How long will it take to fill the tub if I leave both faucets turned on and the drain open?

ANSWER - 80 minutes -

In 24 hours the cold-water faucet can fill 72 tubs.  In 24 hours the hot water faucet can fill 48 tubs.  The drain can empty 90 tubs in 24 hours.  The leak can empty 12 tubs in 24 hours.

Therefore in 24 hours we have 72 plus 48 minus 90 minus 12 = 18 tubs in 24 hours.  Therefore one tub would take 80 minutes to fill.
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Sweet Tooth
Tom can eat 27 Chocolates in an hour, John can eat 2 Chocolates in 10 minutes and Kate can eat 7 Chocolates in 20 minutes.

How long will it take them to share and completely eat a box of 120 Chocolates while watching TV?

ANSWER - 2 hours

In 1 hour Tom eats 27 – John 12 – Kate 21 which = 60 Chocolates in one hour.  Therefore 120 divided by 60 = 2 hours.