Monetary Madness: Inverted Negative Yields in Germany, Negative Rate Mortgages

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Monetary madness hit new extremes. Mortgage rates are -0.5% in Denmark. In Germany, a negative-yield curve inverts.

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

Comments (35)
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jivefive99
jivefive99

So if a negative of a negative is a positive, wouldnt a inverted yield curve of negative numbers mean everything is just fine?? :)

Tony Bennett
Tony Bennett

“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?

DoctorFuture
DoctorFuture

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?

bradw2k
bradw2k

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.

Bam_Man
Bam_Man

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.

Je'Ri
Je'Ri

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.

Escierto
Escierto

Gold was up today $14 but the miners got hammered lower. What gives?

magoomba
magoomba

Anything to continue inflating!
Truly disgusting.

Tony Bennett
Tony Bennett

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

AK2
AK2

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

everything
everything

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.

KidHorn
KidHorn

If you need evidence that MMT does not work, this is it. They've hit the logical limit. Actually giving money away,

Riptide
Riptide

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