Good morning

The headlines:
  1. The Spanish Bond Auction had high demand yesterday. Spain met all of its targets yesterday, with the subscriptions for 10-year bonds being almost double the amount sold. Agreed – the yields on the 10-year bonds were higher than the last sale of 10-years (February); but they didn’t break the magical 6% limit that “most economists see as unsustainable” (the actual yield achieved was 5.743%). And yields on 2-years bonds were slightly lower than in February. What does it all mean? Possibly that the likelihood of default is still distant. Personally? While I think that default is a fun topic – I also think that the big institutions need to do something with the money that they’re holding on to. After all, the bulk of the world’s money supply is governed by policy mandates that designate the types of asset that can be bought, and in what proportion. Whatever else happens, every month, millions of people contribute to their pension, provident and retirement funds, and pay their medical, funeral, life and house insurers. What happens to that money? It falls into the hands of fund managers that need to earn returns with it. As per investment policy statements. Ergo: at the base level of finance, there is a seller’s market. Link: Strong Demand and European Debt Auctions.
  2. Analysts are expecting China to announce a third rate cut in the next few weeks. It’s been a while since the government played around with bank reserve requirements. But according to a news announcement yesterday, the Chinese Central Bank remains committed to “targeted liquidity management actions”. Sounds like a great euphemism to me. In theory, cutting the reserve requirement allows banks to issue more loans through “fractional banking”. Fractional Banking (without reserves) means that a bank can lend money almost infinitely: a depositor places $100 with the bank, and the bank can then lend $100 to a borrower. The borrower then uses the $100 to pay for things; and his suppliers now have $100 that they bring to the bank and deposit; so the bank now lends $100 to someone else. And essentially, the same $100 can be turned into an infinite fortune of bank credit. Where there is a 40% reserve requirement, the bank must lodge 40% of deposits with the Central Bank, and can lend out the remaining. So with the original $100, the bank sends $40 to the Central Bank, and lends out $60. The borrower spends the $60, and his suppliers bring back and deposit $60 at the bank. The bank places $24 (40% of $60) at the Central Bank, and lends out a further $36. And so on, until the bank eventually has lent out around $150 off the original $100. If the reserve requirement is cut to 20%, this translates into $400 worth of loans off the original $100. So that’s the plan. Link: China may cut Reserve Ratio.
  3. And the African Business News in brief. Link: ABN Briefs. The highlights:
    • Burundi’s revenue collection has increased by 17% year-on-year, thanks to reforms meant to attract investment. It’s ironic that higher tax collection attracts investment – but there we are.
    • Lots of mining and oil companies are doing well (the summarised version).
That’s all for now.
Have a good day.