In a world of financial uncertainty, home loans represent stability
August 14, 2019 11:04 AM   Subscribe

Last week, the Danish lender Jyske Bank started offering home buyers 10-year mortgages at an interest rate of -0.5 percent.... This highly unusual condition may be good for Danish home buyers, but economists say it’s an alarming sign for the global economy. Several major governments and more than 1,000 big companies in Europe are now able to effectively borrow from global financial markets at a negative interest rate. For Jyske Bank, that means it can then turn around and lend money at a subzero interest rate, too. Banks are paying people to borrow money. That’s alarming news for the global economy. (David J. Lynch for Washington Post, Aug. 14, 2019 | Archive/copy on MSN Money)

More from David J. Lynch:
“It’s an absurdly odd world and it signals two things,” said investment banker Daniel Alpert, managing partner at Westwood Capital. “There’s an obvious, persistent and continuous glut of underutilized capital and there’s no place in the advanced world for that capital to be invested without excess risk.”

Economic growth is slowing around the world, in part driven by President Trump’s trade war. But there’s a growing debate over whether the global economy is only softening or coming in for a hard landing.

While recent economic data suggests that manufacturing, in particular, is cooling, the interest rates paid by bonds, known as yields, usually only collapse during times of serious economic stress, such as the Great Recession or the Euro-crisis that hit Europe two years later.

Today, Japan and seven major European governments, including Germany and France, are able to sell bonds with negative yields, as are corporate behemoths Nestlé and Sanofi, whose size gives investors confidence they could withstand a downturn.

The United States hasn’t seen such upside-down bonds yet, though the yields on U.S. government debt have plunged, with at least one yield reaching new lows Wednesday. In recent days, top analysts at two giant investment houses — Pacific Investment Management Co. and JPMorgan Chase — have predicted that U.S. Treasury bond yields could go to zero or lower if the United States tumbles into recession.
Back in February of this year, Foreign Investors Now Own a Third of Denmark’s Fixed Mortgages (Nick Rigillo for Bloomberg):
The attractiveness of the world’s largest mortgage-backed covered bond market to international investors has helped keep Danish mortgages low, with local home buyers now being offered 30-year loans at a fixed rate of just 1.5 percent.
More on the recent-ish history of negative yield bonds:

Bloomberg, Feb. 29, 2016,updated on March 1, 2016: Japan Sells 10-Year Bonds at Negative Yield For the First Time

CNBC, July 13, 2016: Germany becomes second G-7 nation to issue 10-year bond with negative yield (1st being Japan)

Bloomberg, September 6, 2016: Henkel AG and Sanofi are poised to became the first non-financial private companies to sell bonds that yield below zero.

Barrons, July 12, 2019: Negative-Yielding Government Bonds Are Old Hat. Now Investors Are Paying to Hold Corporate Debt. ("One example of negative-yielding corporate debt is a euro-denominated bond, issued by Nestlé , that pays ⅜ of a percent in annual interest and is due in 2014. The €500 million ($562.3 million) issue, which is rated double-A, trades at around 102.50. Its yield is negative 0.15%, according to Bloomberg."

France24, 4 July 2019: France issues first 10-year bond at negative interest rate
posted by filthy light thief (28 comments total) 28 users marked this as a favorite
 
“There’s an obvious, persistent and continuous glut of underutilized capital and there’s no place in the advanced world for that capital to be invested without excess risk.”

"...except, of course, Toronto real estate, which we predict will continue to appreciate in value until the sun explodes or said value can no longer be expressed using human numeral systems, whichever comes first."
posted by The Card Cheat at 11:20 AM on August 14 [21 favorites]


Thank you for such a comprehensive post. In my neck of the woods it does feel like potential investors and borrowers are sitting on their savings and homes and waiting to see where our government, economy, and world goes. A close friend of mine is a real estate agent and commented that there have been vanishingly few homes put on the market over the summer, even compared to how slow summer always is. There is a sense of everyone hunkering down and holding our breaths, unwilling to bet on positive future outlook.
posted by sallybrown at 11:22 AM on August 14 [2 favorites]


except, of course, Toronto real estate

And coastal California, particularly SF, LA, and other hotspots, like Santa Barbara, where a 1970s-era single story town house in a good school district goes for $800,000 on a slow day...

But my read of "underutilized capital" was that "there are people with money to spend, and we need to find different ways to take it from them." Then again, I'm not in the field(s) of finances, so I may be mis-reading that.
posted by filthy light thief at 11:23 AM on August 14 [6 favorites]


Yeah thanks for the post.

Yoinks.
posted by carter at 11:33 AM on August 14


“There’s an obvious, persistent and continuous glut of underutilized capital and there’s no place in the advanced world for that capital to be invested without excess risk.”

So what I'm hearing is that we should seize it to invest directly into our communities
posted by Automocar at 11:47 AM on August 14 [47 favorites]


So what I'm hearing is that we should seize it to invest directly into our communities

Our economy is in need of a good laxative!
posted by sallybrown at 11:49 AM on August 14 [5 favorites]


There was a twitter comment claiming these Danish mortgages had non-trivial upfront fees ("points" in American parlance) so the was sort of a back-loaded rebate.

Still, pretty crazy.

And coastal California, particularly SF, LA, and other hotspots, like Santa Barbara, where a 1970s-era single story town house in a good school district goes for $800,000 on a slow day...

They stopped building significant housing in many of these communities decades ago. Supply, demand, etc.
posted by GuyZero at 11:50 AM on August 14 [4 favorites]


There’s an obvious, persistent and continuous glut of underutilized capital and there’s no place in the advanced world for that capital to be invested without excess risk.”

Why is there no place to invest the capital without excess risk?
posted by rebent at 11:54 AM on August 14 [3 favorites]


I sorta read that to mean "everything is risky now"
posted by aramaic at 12:02 PM on August 14 [3 favorites]


"...except, of course, Toronto real estate, which we predict will continue to appreciate in value until the sun explodes or said value can no longer be expressed using human numeral systems, whichever comes first."

Look, Toronto real estate prices suck, we all agree. But right now, I'm trying to sell my condo in Toronto, so Toronto real estate prices need to continue to suck for a couple more months, please.
posted by jacquilynne at 12:05 PM on August 14 [3 favorites]


Why is there no place to invest the capital without excess risk?

This is a huge generalization, but I read this argument along with recent financial developments to mean that people are avoiding investments that could be in a bubble (stocks, housing) and taking on loans in favor of traditionally safer investments (gold, bonds) and building up savings accounts. The former category is more akin to spending and the latter category more akin to hoarding. Thus recent discussions about negative yield rates on savings accounts (like, what if banks started charging you to maintain savings accounts) and the mortgage rates in this post.
posted by sallybrown at 12:07 PM on August 14 [1 favorite]


I sincerely don't understand these negative return rates on bonds. Why would banks/corporations buy an investment they have to pay to own? Why not just sit on the cash? The bonds aren't later adjusted for inflation or variable interest rates, are they?
posted by jacquilynne at 12:10 PM on August 14 [2 favorites]


I sincerely don't understand these negative return rates on bonds. Why would banks/corporations buy an investment they have to pay to own? Why not just sit on the cash?

Inflation, maybe? Loan out the money at a negative interest rate (while making it up on fees on the origination of the mortgate, and bank on being able to adjust the interest rate to a positive percentage at some point in the near future (1-5 years)? If you don't loan the money out, then it's just sitting there losing its value at whatever the rate of inflation is.
posted by Automocar at 12:17 PM on August 14 [1 favorite]


Crashes happen in autumn
posted by The Whelk at 12:21 PM on August 14 [7 favorites]


Although I probably shouldn't answer, I'm interested to see if my understanding is anywhere near reality: If you have money, you store it in a bank. But a bank can't store money in a bank, it has to move it around: money isn't stuff, it's transactions, so when you put your money in a bank, what you're actually doing is buying a share of that bank's transactions. The idea is to use the money to buy and sell things that hopefully grow in value, so the bank makes a lot of profit on the transactions.

You can use money to buy stuff, storing it in the exchange value of the stuff (investing). I suspect that what they mean is that the value of the stuff that people might buy to store the value of money in is widely considered to be about to drop precipitously, so relatively speaking it's worth it to the institutions to store the value in government bonds that may be guaranteed to be worth less after ten years or whatever, but in a reliable way, rather than taking a risk on losing a lot more of the value of the invested money in traditional investment vehicles (property, for example). Losing one way or another being, in the assessment of these people, beyond question.

How's that?
posted by Grangousier at 12:23 PM on August 14 [6 favorites]


From the UK, back in 2009: http://news.bbc.co.uk/1/hi/business/7817453.stm

Whereas the bank rate used to have a record low of 2% (all the way back to 1694!), since 2009 a 2% interest rate would be a huge increase. It's currently "up" to 0.75%.

I gather it has been worse in the UK than most, but a quick google suggests the US Fed rate only started increasing as recently as 2016 and is still very low by historical standards.

It seems to me - and has for some time - that the world never really recovered from the previous economic crisis. It's still hobbling along on the same old low interest rate crutches. Seeing talk about a "obvious, persistent and continuous glut of underutilized capital" as if this has suddenly dropped in out of the blue looks downright bizarre to me.

Disclaimer: I am not an economist.
posted by swr at 12:35 PM on August 14 [9 favorites]


Nestlé and Sanofi, whose size gives investors confidence they could withstand a downturn.
As far as I can tell, Nestle bonds have had slight negative yields since 2015. So they have nothing to do with Trump's trade wars, unless they had a crystal ball.


while making it up on fees on the origination of the mortgate, and bank on being able to adjust the interest rate to a positive percentage at some point in the near future

Right. With the Danish mortgage "points" comment above (points are just additional generally higher interest rate) and fees, the rates for banks aren't really negative. it's just that the 'games' that US car dealers and furniture dealers play (0% interest for the life of the loan!!!!) are moving up the chain to banks.
posted by The_Vegetables at 12:36 PM on August 14


I'm not sure if I understand economics, but I think money is a proxy for utility, or work accomplished that has value to other people. Money supply is an attempt to match the potential for utility, in the hopes that it will enable the exchanges necessary for the work that will accomplish that utility to be done.

As I read it, the money keeps flowing out from Central Banks which believe there is potential for utility, but to people who are tying it up in unproductive uses: high end real estate, art, yachts, etc.

Seems like this imbalance will be solved by those who have the unrealized potential to be productive appropriating that money. Since it isn't happening voluntarily, that's gonna be ugly.
posted by straw at 12:46 PM on August 14 [7 favorites]




Start bulking out and building your Mutual Aid projects now comrades
posted by The Whelk at 2:21 PM on August 14 [5 favorites]


Crashes happen in autumn

The leaves on poison ivy and on a few maple trees are turning red in my neighborhood.
posted by Bee'sWing at 2:40 PM on August 14


Why is there no place to invest the capital without excess risk?

"Excess risk" in this case is a term of art meaning that the risk isn't justified by extra return on investment, vs the risk free rate of return. Basically, nobody is out there offering investment opportunities that make sense: there are probably opportunities (i.e. bonds) on the market with better returns, but not enough to make up for the perceived risk.

Which is basically a way of saying: nobody knows what to invest a lot of capital in, such that they're sure it's going to pay off. So everyone's sitting on their money, looking for very low-risk endeavors that don't pay much (actually pay negative), like home mortgages, in the meantime.

That's my take on it, anyway. This isn't really new: there's been a lot of "hot capital" moving around in the world financial system since the dot-com bust at least, and it's even worse because of China and the limited opportunities for domestic investment there, which pushes money onto the global market. I think the monetarist take would be that more taxes are required to soak up the extra supply, though I am unqualified to really make that argument.
posted by Kadin2048 at 5:31 PM on August 14 [4 favorites]


If you can't get enough of negative interest rates, here is a related metafilter FPP from a week ago - Coming Soon to the US: Negative Yields?. Some of the comments there also focused on the problem of too much capital. This is really an interesting idea - that a central lender could turn around and pass that negative interest rate on to someone else in the form of a mortgage.
posted by kovacs at 6:30 PM on August 14 [3 favorites]


The_Vegetables: As far as I can tell, Nestle bonds have had slight negative yields since 2015. So they have nothing to do with Trump's trade wars, unless they had a crystal ball.

Yeah, after collecting articles about Japan, Germany, and German companies selling bonds with negative yields in 2016, the connection between Trump's trade wars and these decisions don't seem to be there, or Trump isn't the only one making the financial world go topsy-turvey.
posted by filthy light thief at 10:15 AM on August 15 [1 favorite]


I've written previously on the underlying structural (in the economic sense) issues that set the stage for recent events and it's already been covered above, so I'll not get into that again.

What I do think is important to note is that the business press has been very reluctant to point out the elephant in the room that is the main reason it's coming to a head right now: Brexit.

With both the US and Europe looking very uncertain in ways that could have very large unforseeable downside risk for nearly any kind of investment, it's no wonder we're seeing yield curve inversion. For the moment, it's a rational response to the short term uncertainty posed by Trump's complete unpredictability and the prospect of a no deal crash out Brexit having widespread economic consequences that nobody sees in advance, above and beyond what is already expected.
posted by wierdo at 12:28 AM on August 16


the monetarist take would be that more taxes are required to soak up the extra supply

My sense as well, although I'm also not an economist. I'm economist-adjacent!

If the death cult of neoliberalism hadn't metastasized so horrifically and consigned progressive taxation to the swear word bin, we could be seeing record-breaking levels of public investment - instead the mantra of public risk / private profit seems poised to topple the whole house of cards.
posted by aspersioncast at 11:29 AM on August 16 [1 favorite]


What is money anyways? Little green pieces of paper, and numbers in ledgers, have no intrinsic value. They are just a set of IOUs people hand around, a way of keeping score, a theoretical framework that allows people to cooperate to do much more complicated things than they could do alone.
posted by elizilla at 12:45 PM on August 16


The "money has no intrinsic value" thing stops hard and fast when the people with guns and badges show up demanding you pay taxes in that sort of money.

It's sort of like the XKCD comic about centrifugal force. Money may not have value in a totally abstract sense, but in the actual world in which we live, it has a very real value imposed on it by the state, via, when the rubber really meets the road, the state's killing-people-breaking-things apparatus.

There are people who try to live completely without touching "government fiat currency" (or whatever euphemism they want to use) in favor of barter, bitcoins, gold, etc., and either they exist wholly in the shadows, hiding from tax authorities, or they have to convert some of their barter-medium for filthy fiat currency come tax time to pay the bills.

A lot of morons who try this seem to end up going to prison eventually for tax evasion. Shocker.
posted by Kadin2048 at 5:04 PM on August 19 [1 favorite]


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