Vocabulary needed to make sense of the new normal




You can now get a mortgage in Denmark to be paid over 10 years at negative interest — homeowners are being paid to borrow, in other words.

This may seem like an abnormality or idiosyncrasy, but check out the global market for debt, bonds issued by governments and corporates. A quarter of these bonds, about $16-trillion in all, according to Bloomberg, are trading at negative yields, meaning investors will get less back than they put in assuming the bond trades at these levels to maturity.

Negative rates are seriously spooking markets. Money managers are used to getting a positive return on their investments. They want, for example, to be able to tell pensioners that their retirement funds are growing, not declining.

But with the rates set by central banks in major markets at or near zero, and recessionary talk increasing in some of these markets, there is widespread concern that central banks will not be able to make use of their key tool, slashing interest rates, to stimulate demand and counter the threat of recession.

Central banks have collectively used quantitative easing, spending trillions buying assets such as government bonds, to improve liquidity in the financial sector and encourage lending, but this exercise has exacerbated economic inequality by raising values for the asset-owning classes. They are unlikely to want to repeat the exercise, given that it has achieved at best limited, mixed or short-term results.

We may have to get used to, at least for a period, to negative rates. A paper by International Monetary Fund economists has argued as such.

Twenty-year mortgages have been available from Nordea Bank in Scandinavia at 0%, but Jyske Bank, Denmark’s third-largest bank, has gone further with 10-year mortgages at -0.5%, effectively paying homeowners to borrow from it.

Jyske Bank economist Mikkel Høegh told The Guardian it can borrow from institutional investors in the money markets at a negative rate, and is simply passing this on to its customers.

The Financial Times reported this week: “Negative interest rates first appeared in Japanese money markets two decades ago. Since the financial crisis, they have engulfed government bond markets in Japan, Sweden, Switzerland, Denmark and the eurozone — all economies grappling with low inflation where the central bank has set interest rates below zero. Investors thirsty for yield have been forced to look elsewhere, ensuring the spread of sub-zero yields and dragging down borrowing costs everywhere.”

And The Guardian reported: “While the Bank of England’s base rate is 0.75%, and the European Central Bank’s main rate is zero, in Denmark (which is not in the eurozone) the equivalent rate is -0.4%. In reality, the Jyske Bank mortgage borrower in Denmark is likely to end up paying back a little more than they borrowed, as there are still fees and charges to pay to compensate the bank for arranging the deal, even when the nominal rate is negative.”

The word “oddity” comes up in the coverage of Jyske Bank’s interest-negative mortgages. Another unusual event this week was the 48% collapse in value of Argentina’s stock market on Monday, on a surprise primary election result which favoured populist Alberto Fernandez over the more market-friendly Mauricio Macri, the former wanting to default on loans, impose capital controls and renegotiate its arrangement with the IMF.

Bloomberg reported there was a 99.994% probability that the Argentina sell-off wouldn’t happen, mathematically constituting a 4-sigma event likely to occur only once in several decades.

Oddity or the new normal perhaps, requiring a new vocabulary to make sense of it all?

Kevin Davie

Kevin Davie is M&G's business editor. A journalist for more than 30 years, he has worked in senior positions at most major titles in the country. Davie is a Nieman Fellow (1995-1996) and cyberspace innovator, having co-founded SA's first online-only news portal, Woza, and the first online stockbroking operation. He is a lecturer at Wits Journalism. In his spare time he can be found riding a bicycle, usually somewhere remote.


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