For Americans accustomed to paying 4 or 5 percent 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.
Banks are paying people to borrow money. That’s alarming news for the global economy.
Banks are paying people to borrow money. That’s alarming news for the global economy.
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| Banks are paying people to borrow money That’s alarming news for the global economy |
The Danish lender last week started offering home buyers 10-year mortgages at an interest rate of -0.5 percent. 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 home buyers, 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 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, 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 around the world, in part driven by President Trump’s trade war. But there’s 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 Great Recession or the 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 Nestlé and Sanofi, whose size gives investors confidence they could withstand a downturn.
The United States hasn’t seen such upside-down bonds yet, though the yields on U.S. government debt have plunged, contributing to the deep market sell-off Wednesday as key bond yields fell sharply. 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 United States tumbles into recession.
“This is the ultimate indicator that something is fundamentally wrong with the world economy,” said Adam Posen, president of the Peterson Institute for International Economics. “The escalation of the trade war is making it worse.”
Indeed, the trade war is intensifying bond market fears of the first global recession in a decade. After Trump tweeted on Aug. 1 that he was putting tariffs on an additional $300 billion in Chinese goods, more than $1.7 trillion of bonds slid into negative territory over the next week, according to data compiled by Bloomberg.
An investor who buys a bond is effectively lending a company or government money. Bond buyers typically demand a rate of return, or yield, to compensate them for the use of their money and the risk that inflation will erode the value of the payments they receive over time.
