20-Year Mortgages Hit Zero for First Time in Danish Rate History | Hacker News Reader

20-Year Mortgages Hit Zero for First Time in Danish Rate History

bloomberg.com

66 pointsptr54 comments

This seems like a good place to ask the question: how is it that we're seeing $15T of bonds worldwide trading with negative yields? [1]

TFA suggests this is due to structural factors--institutions that are required by law to own AA/AAA bonds. Is this some deficiency in the law or corporate governance, that cash in this circumstance isn't considered a substitute for a negative-yield bond? Its net present value would be greater. I can't imagine a scenario in which you would come out financially ahead from owning a negative yielding bond instead of cash.

[1] https://www.cnbc.com/2019/08/07/bizarro-bonds-negative-yield...

There is no risk free and cost free way to hold large amounts of cash. You can deposit it at a bank, but the bank could go under. You could keep paper cash in a vault but you’d have to pay to guard and maintain the vault. There’s no actual way to just “hold cash”.

Why couldn't you just deposit it with the state's central bank, which is what commercial banks do? Their cash balances are just numbers in an electronic ledger. There isn't some vault with physical cash inside and armed guards on the outside.

Because the central bank has negative interest? It's the reason commercial banks will refuse to store sufficiently large amounts of cash in a 0.00% checking account (even though they offer it for smaller amounts).

Hmm FED rate is NOT negative?

Fed isn't but Japan and many European central banks are. Bank of Japan and ECB are both at -0.1%.

The ECB is more like at -0.4%. Outrageous.

https://www.ecb.europa.eu/stats/policy_and_exchange_rates/ke...

> Why couldn't you just deposit it with the state's central bank, which is what commercial banks do?

In the US, the answer is that the Fed says you can't. There's some good discussion on a recent attempt/request to change this at [0] (Scott Sumner), [1] (John Cochrane), and [2] (Matt Levine).

[0] https://www.econlib.org/why-does-the-fed-oppose-narrow-banki...

[1] https://johnhcochrane.blogspot.com/2019/03/fed-vs-narrow-ban...

[2] https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...

You can! ..... if you live in North Dakota: https://bnd.nd.gov/

> Why couldn't you just deposit it with the state's central bank,

Because state central banks won't take you as a customer because they aren't commercial banks, aren't interested in being commercial banks, and are often legally prohibited from acting as commercial banks.

Also, because negative interest bond rates are produced by the same conditions which motivate negative central bank interest rates, so it's not much of a solution even if it was allowed. Bank deposits and bonds are both ways of loaning people cash you aren't currently using (but demand deposits mean it is legally expected for them to give money back on demand, so usually has lower interest due to the greater convenience.)

It seems like this applies to any sort of counterparty risk, though - if you buy a bond with negative interest rates, there is no guarantee that they will pay it back, or that there will even be an organization to pay it back. In fact, with negative interest rates, there's an incentive to borrow as much as you can, just let it compound, and never pay back the money.

...come to think of it, this explains a lot about today's perma-bubble world.

Certain developed country governments are considered safer than private banks and companies, which is why they can persuade people to accept negative interest rates on their bonds whereas regular private entities can’t.

This is one of the key interesting aspects of cryptocurrency to me. Anyone with a little knowledge can generate their own private key and store/move any amount of money in it securely.

Your wallet key can be stolen, there might be an undiscovered vulnerability, in the protocol, the currency could tank in value, etc

Great question.

Not sure I have an 'answer' but think it has something to do with the demand for money today vs the demand for money tomorrow.

Lots of the world's money is being held in the hands of those with...a lot of money.

Those people tend not to need money to spend it, and are looking for places to park it. Meaning there is a large supply of money today.

Meanwhile, lots of people need money, but there are fewer and fewer places where money can go and get a 10%+ return, so the demand for money today isn't that hot.

If supply is up, and demand is down, the price goes...down.

The 'price' of money today vs money tomorrow is basically the interest rate. So lots of supply, not much demand, and the price has collapsed.

Now why demand and supply are in that position, that's another (harder) story, and one that I've yet to see a good synthesis of.

I'll butcher this explanation, but part of (actually a lot of) the blame is governments saying they need to have a balanced budget or surplus, thus performing austerity since 2008, but making the vulnerable in society suffer (guess why the working class are a bit angry nowadays, voting in right wing populist governments and morons like, well, you know who).

In an ideal world, the government would borrow money and spend it in infrastructure and social projects; this would keep people employed, and employed people would be saving less for rainy days but spending a bit more, keeping the economy spinning and demand up.

So nowadays people with money don't know where to put it to make it grow, incredibly this has also lead to Bubble 2.0, investors being attracted to startups like Uber or food delivery crap where they use investor money to build tech to exploit the under-employed (see above), because, well, these "unicorns" promise good ROI!

Some folks on HN don't like Krugamn, and no one is perfect, but I think he has decent explanations and takes on many things. The idea of budget deficit versus surplus is an interesting topic over the last ten years or so:

> I would summarize the Keynesian view in terms of four points:

> 1. Economies sometimes produce much less than they could, and employ many fewer workers than they should, because there just isn’t enough spending. Such episodes can happen for a variety of reasons; the question is how to respond.

> 2. There are normally forces that tend to push the economy back toward full employment. But they work slowly; a hands-off policy toward depressed economies means accepting a long, unnecessary period of pain.

> 3. It is often possible to drastically shorten this period of pain and greatly reduce the human and financial losses by “printing money”, using the central bank’s power of currency creation to push interest rates down.

> 4. Sometimes, however, monetary policy loses its effectiveness, especially when rates are close to zero. In that case temporary deficit spending can provide a useful boost. And conversely, fiscal austerity in a depressed economy imposes large economic losses.

* https://krugman.blogs.nytimes.com/2015/09/15/keynesianism-ex...

On austerity, there's a good book that goes over its origins and history:

* https://en.wikipedia.org/wiki/Austerity:_The_History_of_a_Da...

Good videos of talks and videos by the author, Mark Blyth, if you do a search.

Something I have thought privately for years is that lowering the "cost of money" is the best way to reduce inequality. It is beginning to look like we may find out as that cost keeps going lower.

> This seems like a good place to ask the question: how is it that we're seeing $15T of bonds worldwide trading with negative yields? [1]

We've been on a 10 year run of growing economies after the Great Recession and stocks/equities have price-to-earning (P/E) ratios that are really high—as high as what they often were before other corrections and/or recessions:

* https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-ea...

* https://www.starcapital.de/en/research/stock-market-valuatio...

> Here’s the price-earnings ratio for the S&P 500 since World War II. Right now it’s hovering a little above 25. In the past three decades, it has never reached that point without leading quickly to either a deep correction or a full-blown recession.

* https://www.motherjones.com/kevin-drum/2017/12/raw-data-the-...

So people are worried about equities and "running to safety" of bonds. But there is a lot of demand for bonds, but only a limited supply: when governments tend go to the market and ask for money, usually private investors ask "what are you willing to pay me for the use of my money?". And private investors get a positive return.

But now it's the opposite: private investors are saying "I'm so worried about my money that I am willing to pay you, the government, to hold onto it". And so private investors get a negative return—because they're worried having the money in (stock) market could be worse than a predictable negative rate from a government.

Between the Summer 2007 and November 2008 the S&P 500 dropped by (IIRC) >40% during the fiscal crisis before the Great Recession: a bond "returning" -1% isn't too bad in comparison.

PE ratio has declined to 22 since that article was written.

https://www.multpl.com/s-p-500-pe-ratio

2018 was quite the year:

> After closing at an all-time high on September 20, the S&P 500 entered a bear market on Christmas Eve. The technical definition is a 20% peak-to-trough drawdown, but I’m willing to give this 19.8% fall the benefit of the doubt.

* https://awealthofcommonsense.com/2018/12/the-forgotten-bear-...

The S&P 500 then hit another all-time high this year (2019), before dropping back down recently. The US/Trump sabre rattling and introducing tariffs/trade wars isn't helping with confidence either:

* https://www.nytimes.com/2019/08/07/opinion/tariff-tantrums-a...

* https://fred.stlouisfed.org/series/T10Y3M

Various other stock markets are experiencing drama as well:

* https://www.starcapital.de/en/research/stock-market-valuatio...

Great answer - thanks. HN is a better place because of answers like this: logically structured, has references, simple but not 'dumbed down'.

And no bank can guarantee very large amounts to the same degree as a government bond? (or even are willing to accept I guess)

(In Norway banks only guarantee up to about $200k in the event of a bankruptcy)

Wasn’t the question about cash versus bonds—not equities versus bonds?

Honest question: What advantages do bonds with negative rates have over cash with low positive rates? Do bonds protect against inflation?

"Cash" in quantity usually doesn't mean literal dollar bills or euro notes. "Cash" typically means instruments like US Treasury bills or the bonds issued by other governments.

The negative rates are in essence what investors pay in order to hold their money in "cash."

If the negative interest rates go even lower, like from -1% to -2%, then you get a capital gain on your bond and can profit by selling it, instead of holding to maturity. The longer until maturity, the more your gain, so this mainly helps with long-term bonds.

https://portfoliocharts.com/2019/05/27/high-profits-at-low-r...

(I'm not claiming this is the reason people hold these bonds, just describing the scenario where they would come out ahead vs. cash.)

There are a few reasons:

1) Say I'm a Danish pension fund looking to park my money somewhere super safe. I can buy US government bonds that pay 1-2.5% (depending on length to maturity) and indeed many foreign investors will do this. But I still have some risk there, because what happens if the value of the dollar goes down against the Euro and now I lose 5% instead of making 2%? So I look for something denominated in Euros. I can invest in corporate debt, but that isn't as safe. And for the largest, safest companies, that debt might pay zero or even negative anyway, since it just needs to pay a bit higher than Danish government debt to attract investors. I can buy Euro denominated Greek bonds, but again, not as safe. If I want a super safe investment, I want Euro denominated government debt from a stable government known for paying its debts. And if those governments pay negative interest, I'm stuck and I have to do it anyway, because pension funds aren't allow to take many risks.

2) The same thing with currency fluctuation holds on the other end. If I'm an American, I can buy US Government debt. And most will. But if I think that the Euro is going to rise against the dollar, I can bet on that Danish debt and if the dollar goes down 5% against the Euro, I come out a winner. And I still get the guarantee of the stable Danish government that the debt will be paid in full (in Euros).

Of course, you might wonder, why not store the money under your mattress? You'll come out ahead that way! Of course you will, unless something happens to that money. Imagine you have a million dollars in cash. Would you store that under your bed? Of course not! You'd get a safe. But you need a really good safe for $1 million, so that's gonna set you back 10k, and you still won't sleep well at night. So to sleep better you put your money in a bank. But the bank can't take your money and loan it out profitably, because mortgages are at zero. So they tell you, fine, we'll take your money but we're gonna charge you for the service of keeping it safe. It'll be 1% a year and now you can sleep better at night.

Now, if you are a pension fund with $10,000,000,000 in assets, you can't just go to a local bank. So instead, you invest in government debt, which is really just the government keeping your money safe for you for a fee.

> So they tell you, fine, we'll take your money but we're gonna charge you for the service of keeping it safe. It'll be 1% a year and now you can sleep better at night.

Banks in Europe are charging people a percentage to hold their money? That's a bit of context that helps, since that is unheard of in the US. At worst they charge flat fees, and that's usually for having too little money.

> Banks in Europe are charging people a percentage to hold their money?

The European Central Bank charges banks negative interest to hold their money for them, which is a reserve requirement. Those costs may be forwarded to customers (but 1% is not a realistic figure).

Either way, you don't want to store your money at a bank beyond what is insured.

> That's a bit of context that helps, since that is unheard of in the US.

As of yet, but that might change.

Now that other people have tried it out, the Fed is likely to consider negative rates as an available tool. See, e.g.:

https://www.frbsf.org/economic-research/publications/economi...

> The European Central Bank charges banks negative interest to hold their money for them, which is a reserve requirement.

The ECB requires the reserve be deposited with them? There is no "vault cash" provision like the US?

Vault cash is possible, but that costs upkeep too. It does limit the central bank ability to go deeply negative though, which is one argument for going "cashless".

Its because every country & currency bloc is manipulating their currency.

Only a few of those get designated as currency manipulators for political convenience.

It is that simple.

The primary tool to manipulate the currency is by introducing additional money into the supply. The primary way to do that is to buy bonds at a premium price (where whoever previously owned the bond and sold it now has new money that didn't exist before, this trickles throughout the system diluting the value of the currency for everyone else). Pushing up the price of bonds pushes down the yield. Newly issued bonds are done at the market price and tolerance (what the market can bear). So if the prevailing rate is 0% or -0.5%, newly issued debt in the same risk range yields 0% or -0.5% too.

Can you get a Danish loan to fund the purchase of a foreign (ehem U.S.) residence?

This was my reaction too. If any Danish banks are reading this and want to make a juicy half percent, hit me up.

You'd be taking on currency exchange risk, as the Danes will want to loan you Euros but you'll likely be paying back the loan in USDs.

They'll most likely want to loan you some DKK, not EUR.

Denmark is not in the Euro, it uses the Danish Krone (DKK), though it is pegged to the Euro.

> You'd be taking on currency exchange risk

Swapping loans is fairly trivial, and would leave one with a mortgage rate competitive with American ones.

Yes, however it's very difficult unless you have strong banking relationships in eg Denmark. Having a lot of money usually helps. I've routinely run across stories about prominent financial industry people that get mortgages in currencies they believe will drop in value. If you have the connections and financial heft to make it worth their time, you can get international loans. It's nearly impossible for an average person.

For example:

"Kyle Bass Is So Bearish On Japan, He Financed His Home In Yen"

"The Dallas hedge fund manager (no relation to the famous Bass family of Fort Worth) is so convinced the Japanese government's profligate spending will drive the nation to the brink of default that he financed his home with a five-year loan denominated in yen, which he hopes will be cheaper to pay back than dollars."

This bet may have paid off. The Yen/USD went from 80-90 to 1 in 2010, to 122 to 1 by mid 2015 with the Japanese move to debase.

https://www.businessinsider.com/kyle-bass-is-so-bearish-on-j...

ELI5, how do banks make money if they don't charge interest?

Maybe they couple it with other services like the mortgage insurance or a life insurance or they request that your salary be credited to a checking account at their bank.

Assuming they make money, could they then go sub zero?

With fractional reserve banking it is even better, as credit effectively creates money out of thin air. This increases the overall supply of money in an economy, so banks can make money from other sources when that money is spent (e.g. credit card processing fees).

The loans are considered assets of the bank, so still increases it's value. And if the loan ends up in an account on their books (there's not that many banks in Denmark), they can then loan out that money again minus the fraction they need to hold.

Why would people not buy extra properties with these mortgages “just in case”? Especially the 10 year one seems low risk and worst case you have a property after 10 years?

Because the principal is due each month and the rent gives a negative cost of carry? Plus future falls expected due to demographics?

You still need a down payment and cash flow for monthly payments. It's just that the monthly payments contain no interest portion, just principal. Danish real estate is expensive, not many people can afford to make payments on multiple properties.

With good regulation (unlike the US before the bubble popped) low rates are not a problem.

[citation needed]

Worst case is you lost a lot of money, because low-interest mortgages push up real estate prices and have been doing so for a while. If the bubble pops, you will still be paying 100% of the money for something that's worth maybe only 50%.

Need cash flow for mortgage payments.

Need down payment.

Price are inflated by increased demand due to zero interest rates. How much will they drop when they rise?

Negative rate morgages seem pretty crazy to an American eye! :)

Zero or negative rates for consumer loans is crazy everywhere. But so is having a fixed 30year mortgage of 3-5% when the interbank rates are near zero.

Why? The bank could loan that money to the US Government for 2%-3% over that same lock-up period. What does the funds rate have to do with it?

I'm suprised no one has mentioned gold. You can buy physical gold and store it. Doesn't take much space

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