Monetary Madness: Inverted Negative Yields in Germany, Negative Rate Mortgages
This morning, the German 3-month bond yield is -0.558% while the 10-year bond yield is -0.593. Thus 10-year bonds yield less than 3-month bonds (inversion), while the whole curve is negative.
Never Cheaper to Borrow
Meanwhile, Jyske Bank, the third-largest bank in Denmark announced it will Pay Customers to Take Out Mortgages by Offering Negative Interest Rates.
Jyske Bank will offer prospective homebuyers an interest rate of -0.5%.
“It’s never been cheaper to borrow,” said Lise Nytoft Bergmann, chief analyst at Nordea Bank’s home finance division in Denmark, to Bloomberg. “We expect this to contribute to driving home prices higher.”
Need a longer term? No problem.
Nordea Bank Abp offers Zero-Interest Rates for 20 Years.
Danish 10-Year Bonds
Voluntarily Losing Money
Paying people to borrow is a money-losing operation and banks don’t voluntarily lose money.
So, how are banks not losing money?
Interest on Excess Reserves
Neither article explained but it likely has to do with interest on excess reserves and/or Central Bank policy.
In the Eurozone, which Denmark is not a part of, the ECB charges interest on excess loans unless banks show a willingness to lend. The Eurozone rate is -0.4%.
Reuters reports ECB Would Rather Pay Banks to Lend than Cut Charge on Idle Cash.
Draghi said policymakers were considering the need to mitigate the impact of the ECB’s negative deposit rate on lenders’ profits, a coded reference to a tiered system where some excess reserves are exempted from that charge.
But this option, which is being studied by the ECB’s staff and has already been adopted by countries such as Japan and Switzerland, met with widespread scepticism on the Governing Council, the sources said.
A similar policy for Denmark could be in place.
Denmark 3-Month Yield
The Danish 3-month yield and central bank funds rate at -0.65% provides another possible explanation.
Banks would rather lend at -0.5% than lose 0.65% on excess reserves.
In the US, the Bernanke, Yellen, and Powell paid interest on excess reserves thereby slowly bailing out the banks over time.
Europe went the opposite direction punishing banks and weakening the banking system with negative interest rates.
Recall that excess reserves are a function of central bank attempts to force more debt into the system via QE and other central bank operations.
But excess reserves just shift location when a bank makes loans because loans inevitably get deposited elsewhere.
Trapped in a Box
The central bank effort is monetary madness but Trump wants the Fed to march to the same mad tune.
For further discussion of this economic madness, please see Fed Trapped in a Rate-Cutting Box: It’s the Debt Stupid
Mike “Mish” Shedlock