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Borrow My Money – Please!

Jyske Bank headquarters.
photo courtesy Jyske Bank

Perhaps it’s a sign of the strange times we live in: A bank in Denmark is now paying homeowners to take out mortgages.

Jyske Bank’s offering is an oddity, but it is the illogically logical end point of a trend that has taken root in Europe and Japan. Central banks have cut interest rates below zero, and governments have sold bonds with negative rates, or yields, for years now. And while the United States is not in immediate danger of joining them, the prospect is less unthinkable than it used to be.

When Danish Jyske Bank recently unveiled its negative interest rate mortgage, it anticipated customers’ confusion and skepticism. The bank’s online FAQ about the product includes questions such as “How is that possible?” The confusion is understandable. Jyske’s borrowers will make monthly mortgage payments as usual, but will ultimately pay the bank slightly less than they borrowed. (Jyske also will charge fees upfront for arranging the deal, which means homeowners will pay at least a little for the privilege to borrow.)

Even in left-leaning Denmark, banks are not charities. Jyske’s housing economist, Mikkel Hoegh, told The Guardian that the mortgage product is possible because the bank can borrow at a negative rate and then pass on this unusual arrangement to its customers. Unfortunately for savers, this odd state of affairs cuts both ways. Jyske offers a whopping 0% interest rate on customers’ deposited savings. It can also get worse: UBS recently told Swiss clients that it would introduce an annual charge for account holders who deposited more than 500,000 euros (about $555,000).

These are the first indicators that long-standing negative interest rates are filtering down to the level of individuals. But financial institutions have had to navigate them for some time. Economic theory once said that negative interest rates were impossible. But in 2009, Sweden’s central bank became the first to establish a negative interest rate, proving it was not impossible after all. In 2014, the European Central Bank cut its main interest rate below zero. Now, largely in the wake of the 2008-09 financial crisis, a handful of central banks have resorted to negative interest rates in a last-ditch effort to boost their economies and ward off deflation.

Below-zero interest rates should theoretically encourage everyone to borrow substantial sums, stimulating the economy. But there are real risks involved. If banks start charging savers to hold their money, people may metaphorically – or literally – stuff their cash in their mattresses instead. Lenders could wind up short of funds. In addition, what is good for borrowers can be bad for investors, who are essentially paying for the privilege of owning bonds due to their perceived safety. Negative interest rates can amplify investor uncertainty, exacerbating one of the problems they are supposed to address. Some analysts have also suggested that negative rates could fuel future asset bubbles.

Nine countries, including Germany, France and Japan, currently issue 10-year bonds at negative yields, according to credit rating agency Fitch. German 30-year bond yields recently dipped into negative territory for the first time. ECB President Mario Draghi has hinted at further monetary easing to come. Other countries, including New Zealand, have indicated that negative interest rates are possible soon. Approximately $15 trillion in government bonds worldwide now trade at negative yields, according to Deutsche Bank. That represents about 25% of the market, an amount that has nearly tripled since October 2018. Some businesses have also issued corporate bonds at negative rates. If you exclude the United States, 43% of all bonds are trading at a negative interest rate.

Despite negative yields, investors are buying up bonds not only because of their perceived safety, but also because investors expect interest rates to fall even further into negative territory. Bond prices rise as interest rates fall, so an investor can still profit on a negative-yielding bond as long as rates continue to decline. What once seemed like a momentary anomaly has proved an ongoing reality to which global bond investors must adapt.

As for the U.S., over the last few years our interest rates came very close to returning to something like “normal.” After years of rock-bottom rates, the Federal Reserve took the economy’s strength as a signal to gradually raise the cost of borrowing. But now the central bank has changed course. In late July, the Fed cut interest rates for the first time in more than 10 years. Fed Chairman Jerome Powell described the cut as an insurance policy for potential challenges to the economy, including ongoing trade tensions between the U.S. and China. Powell also left the door open to more cuts later this year. Such cuts appear more and more likely as U.S. Treasury yields continue to fall.

Cutting rates is all very well in the short term, but it has worrisome long-term implications. If we cannot get interest rates high enough when the economy is strong, the central bank will have limited options when the inevitable recession arrives. The lower interest rates are, the fewer cuts the Fed can make before interest rates reach zero. While keeping rates low now is no guarantee that interest rates will go negative, it increases the odds. Nothing prevents the U.S. from following the global trend toward negative interest rates if conditions do not improve.

Can you expect your bank to pay you to take out a mortgage one day? I wouldn’t count on it. But under the circumstances, I would not count it out, either.

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