Incredibly, a bank in Denmark is offering home buyers 10-year mortgages at an interest rate of -0.5%. Borrowers who opt for these mortgages will pay back less than the amount borrowed. This has come about because of the massive money creation by the world’s central banks.
Only last month the Fed cut its fed funds rate target to 2-2.25%, a quarter of a point. And, it ended its quantitative tightening (QT) program two months early. The purpose of QT was to drain excess money from the financial system.
Shortly after the Fed cut, the central banks of India, New Zealand, Thailand and the Philippines lowered their rates. And, European Central Bank President Mario Draghi has hinted at further easing, which, undoubtedly, would probably deepen the bond market’s negative turn.
Outside the US, 43% of bonds are trading at negative interest rates. Issued as government or corporate bonds, this debt has doubled since December and now totals $15 trillion.
Japan and seven major European governments, including Germany and France, can sell bonds with negative yields, as can corporate giants Nestlé and Sanofi, whose size gives investors confidence the companies could weather a downturn.
Negative yields on bonds first appeared in Europe in 2014 after the ECB drove interest rates below zero and began buying bonds to stimulate the economy. The promised return on Germany’s 30-year bond plunged below zero earlier this month for the first time ever.
Although yields on US government debt have plunged, they are not negative. Yet analysts at Pacific Investment Management Co. and JPMorgan Chase have predicted that US Treasury bond yields could go to zero or lower if the United States tumbles into recession.
Negative interest rates are a serious problem.
Banks, insurance companies, and pension funds rely upon interest to meet their obligations. They have to earn money on their investments. Now — because of negative yields — depositors, policyholders, and retirees could see their retirements plans severely cut or even lost completely. Many insurance companies guarantee pension plans.
Worse, negative rates drive investors into risky investments in search of higher returns. This, undoubtedly, is one of the reasons for the stock market’s rise to new highs. It is also one of the reasons that gold and silver have renewed their bull markets in recent years.
The metals’ 6,000-years history makes them two of the better safe havens for the times ahead.