20-Year Mortgages Hit Zero for First Time in Danish Rate History • Hacker News Board

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

#21

Post by throw0101a » Thu, Aug 08, 2019, 10:03 PM UTC

yasp wrote: post #2

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 b…

> 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.

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

#22

Post by esoterica » Thu, Aug 08, 2019, 10:05 PM UTC

nostrademons wrote: post #10

esoterica wrote: post #3

Earlier quoted context omitted.

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”.

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 t…

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.

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

#23

Post by DennisP » Thu, Aug 08, 2019, 10:05 PM UTC

yasp wrote: post #2

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 b…

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.)

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

#24

Post by alkonaut » Thu, Aug 08, 2019, 10:09 PM UTC

howlin wrote: post #20

aczerepinski wrote: post #16

Earlier quoted context omitted.

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.

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

#25

Post by adventured » Thu, Aug 08, 2019, 10:10 PM UTC

aantix wrote: post #14

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

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...

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

#26

Post by [deleted] » Thu, Aug 08, 2019, 10:13 PM UTC

howlin wrote: post #20

aczerepinski wrote: post #16

Earlier quoted context omitted.

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.

[deleted]

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

#27

Post by dragonwriter » Thu, Aug 08, 2019, 10:14 PM UTC

yasp wrote: post #4

esoterica wrote: post #3

Earlier quoted context omitted.

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.

> 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.)

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

#28

Post by selarkin » Thu, Aug 08, 2019, 10:14 PM UTC

howlin wrote: post #20

aczerepinski wrote: post #16

Earlier quoted context omitted.

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.

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

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

#29

Post by alkonaut » Thu, Aug 08, 2019, 10:15 PM UTC

p1esk wrote: post #18

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.

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

#30

Post by chadash » Thu, Aug 08, 2019, 10:29 PM UTC

yasp wrote: post #2

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 b…

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.