With negative interest rate policy (NIRP) raging in the eurozone and over €1.9 trillion in European government bonds trading with negative yields, many were wondering whether this generosity will spill over to other debtors.
Following consecutive rate cuts during this year by the Danish Central Bank, local Danish banks — Nordea Credit, Realkredit Danmark — are now offering a mortgage with a negative interest rate! Negative interest rates aren’t a new phenomenon in Europe, but they’ve been limited to inter-bank borrowing. FT reported Ms Christiansen received a negative interest rate for her three-year loan, meaning the lender — Realkredit Danmark, a part of Danske Bank — is paying for her to borrow money. The interest rate of minus 0.0172 per cent — which equates to her receiving about DKr 7 each month from the bank — is just one sign of the “Through The Looking Glass” effects of extreme central banking measures in Scandinavia.
The Scandinavian central banks are going pretty far in NIRP. Sweden’s Riksbank became the first central bank in the world to take its main policy rate — the so-called repo rate — into negative territory. Denmark’s Nationalbanken in turn cut its deposit rate — the amount it pays or in this case charges banks for placing money with it — four times at the start of this year to a world record low of minus 0.75 percent.
On April 8th, Switzerland became the first country to sell 10-year bonds with a negative yield as quantitative easing and deflation fears pushed up bond prices. Until Wednesday, no country had ever sold 10-year debt that gives investors a yield of below 10 percent. Sold at a yield of minus 0.055 percent, investors bought 232.51 million Swiss francs of debt, maturing in 2025, at a price that could mean they end up paying Switzerland’s government to hold their money. The Swiss deposit rate is set at minus three-fourth of a percent currently so the new Swiss 10-years are at least theoretically more attractive than that. Swiss National Bank (SNB) also held its target range for the three-month London interbank offered rate (Libor) at minus 1.25 percent to minus 0.25 percent. SNB uses Libor as a reference for steering its money-market rates, which influence rates on bank lending and mortgages.
There is concern for what happens should negative rates persist longer. The biggest immediate concern is over whether low rates will fuel housing bubbles. Fears that negative rates could lead to widespread hoarding of cash or banks charging all customers for current accounts have proven wide of the mark. Investors can hold physical cash as an alternative. But it seems that yields will have to be much more negative before they do that. In part, this is because of the nature of modern money; few people want to hold great piles of cash. It is neither convenient nor secure. Most modern money is electronic and that is subject to negative rates. Furthermore, many investors (pension funds, insurance companies, commercial banks, central banks) are forced, or at least accustomed, to holding government bonds for regulatory or accounting purposes; they are indifferent to price or yield.
A situation has now emerged where savers who pay the bank to hold their cash courtesy of negative deposit rates, are directly funding the negative interest rate paid to those who wish to take out debt. As per Duncan Kerr in euromoney, it may only be a matter of time before credit default swaps trade through zero too. At its simplest, mean one institution paying another institution for the privilege of insuring it against a bond default. It’s a seemingly crazy situation, but in a credit market distorted by quantitative easing and negative rates, anything may be possible.
According to Zero Hedge, that all this will end in blood and a lot of tears is clear to anyone but the most tenured economists, however in the meantime, we can’t wait to take advantage of the humorous opportunities that Europe (and soon Japan and the US) will provide in the coming months, as spending profligacy will be directly subsidized and funded by the insolvent monetary system, while responsible behavior and well-paid labor will be punished, first with negative rates and soon thereafter: with threats, both theoretical and practical, of bodily harm.