This morning, the German 3-month bond yield is -0.558% while the 10-year bond yield is -0.593. Thus 10-year bonds yield less than 3-month bonds (inversion), while the whole curve is negative.
Never Cheaper to Borrow
Meanwhile, Jyske Bank, the third-largest bank in Denmark announced it will Pay Customers to Take Out Mortgages by Offering Negative Interest Rates.
Jyske Bank will offer prospective homebuyers an interest rate of -0.5%.
“It’s never been cheaper to borrow,” said Lise Nytoft Bergmann, chief analyst at Nordea Bank’s home finance division in Denmark, to Bloomberg. “We expect this to contribute to driving home prices higher.”
20-Year Loan
Need a longer term? No problem.
Nordea Bank Abp offers Zero-Interest Rates for 20 Years.
Danish 10-Year Bonds
Voluntarily Losing Money
Paying people to borrow is a money-losing operation and banks don’t voluntarily lose money.
So, how are banks not losing money?
Interest on Excess Reserves
Neither article explained but it likely has to do with interest on excess reserves and/or Central Bank policy.
In the Eurozone, which Denmark is not a part of, the ECB charges interest on excess loans unless banks show a willingness to lend. The Eurozone rate is -0.4%.
Reuters reports ECB Would Rather Pay Banks to Lend than Cut Charge on Idle Cash.
Draghi said policymakers were considering the need to mitigate the impact of the ECB’s negative deposit rate on lenders’ profits, a coded reference to a tiered system where some excess reserves are exempted from that charge.
But this option, which is being studied by the ECB’s staff and has already been adopted by countries such as Japan and Switzerland, met with widespread scepticism on the Governing Council, the sources said.
A similar policy for Denmark could be in place.
Denmark 3-Month Yield
The Danish 3-month yield and central bank funds rate at -0.65% provides another possible explanation.
Banks would rather lend at -0.5% than lose 0.65% on excess reserves.
Monetary Madness
In the US, the Bernanke, Yellen, and Powell paid interest on excess reserves thereby slowly bailing out the banks over time.
Europe went the opposite direction punishing banks and weakening the banking system with negative interest rates.
Recall that excess reserves are a function of central bank attempts to force more debt into the system via QE and other central bank operations.
But excess reserves just shift location when a bank makes loans because loans inevitably get deposited elsewhere.
Trapped in a Box
The central bank effort is monetary madness but Trump wants the Fed to march to the same mad tune.
For further discussion of this economic madness, please see Fed Trapped in a Rate-Cutting Box: It’s the Debt Stupid
Mike “Mish” Shedlock
This is the beginning of the end of the world.
Why are they doing things that are obviously going to end the world?
Because we have run out of cheap to produce energy. And these policies are aimed at desperately trying to fend off collapse.
They will fail. Of course
If you need evidence that MMT does not work, this is it. They’ve hit the logical limit. Actually giving money away,
Maybe I’m just noticing 15/30 converging a little bit, which are running at 3.6 and 3.2 currently, can only guess the 20 is nestled in their somewhere. Their will be new debt instruments coming, further rate cuts will bring that final water shed moment of rollovers. Everyone’s going to get a great rate eventually, but banks are part of economic sector so they need to get paid first.
What am I going to tell my daughter? She just locked in 3.55% for a re-fi. She should have moved to Copenhagen when I told her years ago! ;•0
2yr and 10yr creeping ever closer to inverting.
6 bps from parity. August 1st spread 17 bps.
Just last week – Jim Bullard said since no inversion it was safe to ‘move along, nothing to see.’
I’m sniffing a Lehman Moment in the air.
Come to Papa
Anything to continue inflating!
Truly disgusting.
Gold was up today $14 but the miners got hammered lower. What gives?
Hui down ~1.2% on the day, I hardly call this ‘hammered’!
This is what I would describe as hammered
https://tradingeconomics.com/argentina/stock-market
There is already some buzz in actuarial circles that pension liabilities should be “discounted” with negative rates, i.e. valued higher than the promised benefits, should discount-rate references go negative; the reasoning is that the comparable bonds increase in vaIue when rates go negative, so why shouldn’t DBO as well, not to mention that schemes will have few safe, positive-yielding investments, and therefore will have to dedicate more to cover the certain losses of hedging investments or cash held by a scheme. Industry will attempt to resist this, but never underestimate theoreticians’ ability to destroy economic value. We are living in interesting times indeed.
Serious question here – “How is a negative-yielding bond considered good collateral?” This has got to be an issue within the re-po market at some point.
How is a negative yielding bond considered a good purchase in the first place? Of course, if rates go even more negative… negative infinity is the limit.
It still has principle that has to be repaid at some point.
30Y Treasury down about 200bps from its high last week. 2.6% a month ago … a few more days like this and it will hit 2.0%. This is insane.
Forget the 30. Most loans go off the 10 year which is at 1.64 today. That will be below 1 by the end of the year. There will be another small re-fi boom for anyone that bought a home in the last few years. Rates haven’t been this low since Trump took office.
Down 20 basis points, not 200.
According to Trading Economics, deposit interest rate in Denmark is 2.4%. Where do the banks find the funds to subsidize mortgage loans and pay their staff’s salaries?
I am not an economics or finance guy, but in a society of negative mortgage rates, why would not everyone with existing mortgages refinance them, except for the possibility that they might not appraise for the amount of their outstanding mortgage, and if so, not take a second mortgage to pay off most of the first?
Guessing it is probably for first time buyers only. The real story here is the next generation no longer sees the benefit the carrying so much debt and being locked in to one locale. This generation’s smartphone is their home.
Offer to sell “the next generation” brand new San Francisco housing at the same price per square foot as the returning GIs post WW2, and see if “their smartphone is their home….”
The “next generation” of North Koreans somehow don’t think of the smartphone as their home. Simply because they are barred from either buying or building their own smartphones by the totalitarian state lording over and harassing them. Just as similarly situated “next generation” Americans are barred from buying and building houses by their totalitarian state.
Take off the tin-foil hat. Existing owners in San Francisco are the ones driving prices up. And most of San Francisco is still new wealth (from the last 30+ years).
“It’s never been cheaper to borrow,” said Lise Nytoft Bergmann, chief analyst at Nordea Bank’s home finance division in Denmark, to Bloomberg. “We expect this to contribute to driving home prices higher.”
…
Over/Under on number of months before Larry Yun parroting this?
Months ? It will be in weeks.
So if a negative of a negative is a positive, wouldnt a inverted yield curve of negative numbers mean everything is just fine?? 🙂
“I guess this means that Bernanke was a smarter con-man than Draghi is”
Correct – I have commented on that before – Major policy error by the ECB
Definitely a policy error. But if the ECB is holding a boatload of negative-yielding bonds AND paying IOER, wouldn’t there be a potential solvency issue at some point?
How can solvency be an issue when you control the printing press ?
To Germans, “Solvency” does not involve the use of a printing press. Yet.
Well Mish, I guess you answered my question about if there were negative mortgages available over there!
At some point they may as well start paying for entire homes. That is the next step after negative interest rates isn’t it ? Negative interest rates on home loans will have all kinds of consequences on home prices. Why would a current borrower pay a positive interest rate and not just walk away ? Didn’t we just go through this in 2006-2009.
Depends if mortgages are non-recourse or full recourse. The problem is, those who walk away will face higher prices since everyone will join the gold rush once it gets going.
“This morning, the German 3-month bond yield is -0.558%”
Negative normalization? Will rates reach -6%, rather than +6%? Maybe Bernanke should have said that rates will negatively normalize in his lifetime.
This from John Mauldin today. Looks like the QT/QE adjusted yield curve may have inverted last year.
I guess this means that Bernanke was a smarter con-man than Draghi is.
Question of ownership.
Federal Reserve owned by the big banks. Who TOLD bernanke to pay IOER … to go with their 6% dividend on preferred shares.
ECB owned by EU central banks. Slave to legislatures.
And the Bundesbank is the King of that Hill. Therefore, accumulating negative-yielding bonds AND paying IOER at the same time “ist strengstens verboten”.