Banks are paying people to borrow
For Americans accustomed to paying 4% or 5% mortgage rates, let alone the double-digit figures consumers endured in the early 1980s, the new loan from Denmark’s Jyske Bank might seem inconceivable.
The Danish lender last week started offering homebuyers 10-year mortgages at an interest rate of minus-0.5%. That means borrowers over a decade will pay back a little less than the amount borrowed, not including one-time fees.
This highly unusual condition may be good for Danish homebuyers, but economists say it’s an alarming sign for the global economy. Several major governments and more than 1,000 big companies in Europe are now able to effectively borrow from global financial markets at a negative interest rate. For Jyske Bank, that means it can then turn around and lend money at a subzero interest rate, too.
The amount of this type of debt, issued as government or corporate bonds, has doubled since December and now totals $15 trillion.
The sudden increase suggests that a fast-rising share of investors are so nervous about the future they’re willing to actually lose a little money by lending it to a borrower that is almost certain to pay it back, rather than risk betting on something that could go bust. In a healthy economy, investors would put their money to work in profit-making ventures such as factories or office buildings.
“It’s an absurdly odd world, and it signals two things,” said investment banker Daniel Alpert, a managing partner at Westwood Capital. “There’s an obvious, persistent and continuous glut of underutilized capital, and there’s no place in the advanced world for that capital to be invested without excess risk.”
Economic growth is slowing globally — in part driven by President Donald Trump’s ongoing trade war with China. But there is a growing debate over whether the global economy is only softening, or coming in for a hard landing.
While recent economic data suggests that manufacturing, in particular, is cooling, the interest rates paid by bonds, known as yields,usually collapse only during times of serious economic stress, such as the 2008 financial crisis or the Euro-crisis that hit Europe two years later.
Today, Japan, and seven major European governments, including Germany and France, are able to sell bonds with negative yields, as are corporate behemoths Nestle and Sanofi, whose size gives investors confidence they could withstand a downturn.
The U.S. hasn’t seen such upside-down bonds yet, though the yields on U.S. government debt have plunged. And in recent days, top analysts at two giant investment houses — Pacific Investment Management Co. and JPMorgan Chase — have predicted that U.S. Treasury bond yields could go to zero or lower if the U.S. tumbles into a recession.