Are mortgage rates in Denmark part of a “mad world”?

This morning has started with a familiar drum beat for these times as we see higher bond prices in Japan and the consequent record lows in yields.

The 10-year JGB yield edged down half a basis point to minus 0.160 percent, after earlier setting a record low of minus 0.165 percent…..The 20-year JGB yield also set a fresh record low of 0.180 percent, shedding 1.5 basis points, as did the 5-year yield, dropping half a basis point to minus 0.275 percent .

As prices are going “higher and higher” and yields “Fallin’ ” we are now seeing consequences for the ordinary man and woman and the obvious place to look for this is Denmark. You see it has the longest history of official negative interest-rates with the certificate of deposit rate being cut to -0.2% on the 6th of July 2012 and being -0.65% as I type this. So we about to see four years tick up albeit with a brief spell in 2014 when the rate was raised to the apparent heights of 0.05%. Oh how the Nationalbanken must wish it could erase evidence of that move! As it was wrong footed by a policy change at the European Central Bank with more deception than any player I have seen so far at the 2016 European championships.

Such a thing is especially troubling as we mull how many central banks have started tightening cycles only to find that they cut again and in Denmark’s case to record lows. Although right now it is at -0.65% so just above the nadir of -0.75%. That is quite a contrast to the “expert” view which has had a consensus that negative interest-rates were not going to last long.

Mortgage Rates

This is one of the ways we can investigate the impact on the ordinary Dane and there are new developments in this arena.

Mortgage banks in Denmark stop offering loans when the bonds funding them trade above par on the secondary market. Until recently, lenders were largely dispensing 30-year mortgages with coupons of 2.5 percent.

But the bonds behind them have climbed above 100 in recent days. If demand persists and the notes stay above par, lenders will start offering mortgages at 2 percent and 1.5 percent on 30 year maturities. The U.S. government’s 2.5 percent 30-year bond yielded about 2.45 percent at the end of last week.

As you can see the Danish mortgage borrower can borrow as cheaply as the US Government and if the coupon drops to 2% well they can borrow more cheaply than the UK government over a 30 year period. So the ordinary borrower has the potential to lock in very low levels for mortgage-rates over a 30 year period in which case this particular shadow of the credit crunch era will stretch to at least 2046.  From the way the article is written 2% seems not far off a done deal if 1.5% is also in prospect,although the later feels subject to some hype.

As to whether the Danes will respond well the answer seems to be yes if last year was any guide.

The last time Danish mortgage-bond yields fell to current levels, borrowers refinanced en masse, piling into loans with longer maturities at an unprecedented level. That was last year, after Switzerland sent its franc into a free float……Fixed-rate loans now make up about a third of Danish mortgage lending.

Oh and as to the below isn’t everything these days? The emphasis is mine.

The development has been a windfall for banks, which are under pressure from regulators and ratings companies to cut the proportion of loans backed by short-term bonds to reduce refinancing risks.

I do not know about you but the statement below seems to be rather tempting fate.

What’s more, borrowers can’t walk away from their debt.

Negative Mortgage Rates

There has been a lot of speculation and hype about this but the Danish Mortgage Bank Association keeps a weekly record of the yields on Danish mortgage bonds. The short-term rate for Kroner mortgage bonds was last at -0.23% and has been negative for all but two weeks in 2016. If we move to Euro mortgage bonds as we recall the Krone is pegged to the Euro then the yield on short-term mortgage bonds was last -0.13% and it has been negative for all of 2016 so far.

Back in April the Wall Street Journal was on the case.

Hans Peter Christensen got some unusual news when he opened his most recent mortgage statement. His quarterly interest payment was negative 249 Danish kroner…. Realkrdit Denmark, one of the nation’s largest home lenders, provided 758 borrowers with negative interest-rates last year.

If only his name had been Hans Christian Anderson…

House Prices Rise

Even the IMF is on the case.

Fueled by historically-low interest rates, house prices have risen rapidly in recent periods—especially for flats and in Copenhagen……..the market bears close watching since a continuation of the uptrend would soon bring real house prices in these segments back to pre-crisis levels.

The data is delayed but the owner occupied flat index was up 9.2% in the year to March. The Nationalbanken suggests that the only way is up baby.

expectations of further positive developments in the housing market.

First-time buyers will of course have reason to disagree.

The debt problem

The IMF tried to sweep this issue under its carpet.

and the absence of an attendant rapid build-up in household debt.

That seems fine except if we note this from the Danish mortgage association.

The market value of all Danish outstanding mortgage bonds (traditional mortgage bonds, covered bonds and covered mortgage bonds) exceeds DKK 2,300bn (app. EUR 310bn). The Danish mortgage bond market is actually more than four times larger than the Danish government bond market. The market value also exceeds total Danish GDP.

Sadly it is out of date in terms of data however i helped out a bit on August 24th last year.

The country’s households, which carry the rich world’s biggest gross debt loads relative to disposable incomes…


There is much to consider here but whilst the mainstream media continues of course to blame this on the Brexit referendum there is a culprit even closer to home. The Nationalbanken pegs the Krone to the Euro which means that Danish securities and an extremely close proxy for Euro area ones whilst the peg holds. The consensus view on the peg  is given by Bloomberg.

The man running Denmark’s biggest pension fund is convinced nothing can break the country’s euro peg.

This means that the 172.2 billion Euros of the third phase of the ECB’s covered bond purchases will have a strong effect on Danish covered bond prices and yields too. Odd that this is missed and of course there will also be an impact from the new corporate bond program which is doing this today.

ECB out again this morning buying more short end autos, 2-3y Chem names & 7-10y Pharma names (@creditmacro )

What could go wrong?

Also with the strong influence of the housing market on the economy of Denmark you might think that the economy would be surging, certainly economics 101 tells us that. But the last 3 quarter have gone -0.6%, 0.1% and then 0.5% so an improving trend yes but just under flat overall. If we look bank the Nationalbanken notes a credit crunch era of relative underperformance.

The low rate of growth in Denmark is to a large extent attributable to weak domestic demand.

On the other side of the coin Denmark does have substantial pension fund assets. How are they going though in a negative interest-rate world…..

Time for Tears For Fears or more recently Gary Jules.

When people run in circles it’s a very very
Mad world
Mad world
Mad world
Mad world




The world of negative interest-rates and yields continues to expand

Friday afternoon saw another nexus point in the development of negative interest-rates and yields. The US Employment Report saw not a few apparent contradictions but as a headline the non farm payrolls or NFP number was net negative. What I mean by that was downward revisions to past months at 59,000 were higher than 38,000 jobs created in May. This was awkward to say the least for all the US Federal Reserve members who has been jawboning via Open Mouth Operations about an interest-rate rise this month. A case of foot in mouth for a few! This brings us to a theme of this blog which is that promised interest-rate rises are either non-existent as in the Forward Guidance of the UK’s Mark Carney or are way underpowered like in the US. What I mean by the latter is that we started 2016 with promises of 3-5 interest-rate rises this year but as of today have seen none at all.

Interestingly such news does not seem to have reached the UK Prime Minister.

David Cameron has warned that mortgages could rise for millions of homeowners if Britain votes to leave the EU.

The Prime Minister has said average repayments could rise by nearly £1,000 a year because leaving Europe could lead to tighter credit controls as well as pushing up interest rates.

That was a bit awkward for Bank of England Governor Mark Carney as isn’t that what he has promised via his Forward Guidance? But if we look at financial markets we see that such rhetoric is in fact from a universe far,far away. Of course things may be different on June 24th whatever the result of the UK Referendum but these days interest-rates do not seem to rise even when it is supposed to be policy for them to do so.

Negative Yields

Fitch Ratings have upped the ante of the size of this problem.

The global supply of long- and short-term sovereign securities yielding less than zero now nears $10 trillion, constraining the ability of banks, insurers and other sovereign investors to generate fixed-income returns.

They had in fact provided a critique to the words of David Cameron if you substitute UK Gilts for US Treasuries in the sentence below.

One possible implication of a growing stock of negative yielding debt is increased demand for higher-yielding government securities like U.S. Treasuries, which could keep long-term yields low,

They also point out why this is a problem.

The total amount of negative yielding government debt stood at $9.9 trillion ($6.8 long-term and $3.1 short-term) globally as of April 25, 2016. This debt currently yields negative 24 basis points (negative $24 billion) annually. If historical rates were available today, the same securities would have yielded 1.23% ($122 billion) using 2011 yields, and 1.83% ($180 billion) using 2006 yields.

That is quite a lot of money taken out of the system as we see yet another side effect of QE (Quantitative Easing) style policies. These side-effects continue to build up but advocates invariably just mimic Agent Smith from The Matrix series of films and cry “More! More!” You see the problem would be solved in the economic models at the rarified heights of their Ivory Towers meanwhile below the clouds reality for plebs like us is rather different. So far 2016 has seen an extra US $4 trillion or so of negative-yielding government debt and lest we forget the advent of negative yielding corporate debt as well.

Meanwhile even the Japanese seem to be turning ever more Japanese.

Japan accounts for 66% ($6.5 trillion) of the total outstanding negative yielding debt, bolstered by the BOJ’s negative rate policy and increased purchases of Japanese government bonds.

Also more Italian government bonds are at a negative yield now.

More Negativity

The response to Friday’s US Employment Report was for world bond prices to rise overall and therefore for yields to fall further. The obvious link was to the US Treasury Bond market where the 2 year yield has become something of a proxy for interest-rate expectations and is now 0.79%. Now you can say that the official US interest-rate is 0.38% ( Fed Funds) or 0.5% (the target) but whichever you choose there is scope for a rise of 0.25% but not much more over the next 2 years. At the opening of 2016 as the Federal Reserve made its interest-rate promises it rose to 1.1%.

Bond markets like to flock together so you will not be surprised to read that this had implications elsewhere. From Nordea Markets and the emphasis is theirs.

the dismal employment number resulted in a sharp drop in the 10Y Bund to end the day at 6.7bp.

There are arguments as to whether this is a closing low for yields and high for prices but you get the idea if you think of 0.067%  a year for ten years. A grim outlook if you are willing to accept that. But this has other consequences if we look elsewhere in Germany’s bond market. It has a negative yield out to 9 years or over 70% of the market and the yield on the 5 year Bobl is so low that even the ECB will no longer buy it although of course it remains a back stop at -0.4%. I note ( h/t @YanniKouts) that we are seeing another side effect or unintended consequence of QE.

Spanish and Italian banks refrain from providing loans to the economy and increase purchases of German Bunds ~

Just for clarity that is exactly the reverse of the message from the Ivory Towers as we note yet again that central banking policy always helps the banks. Let’s face it the Italian banks do need a lot of help or as it is officially put they are “resilient”.

If we move to the UK then the 10 year Gilt yield closed the week at 1.28% which is very close to a record low for it. Nobody apparently told Prime Minister David Cameron as of course if it stays there we can expect even more record lows for mortgage rates. The 5 year Gilt yields 0.74% as opposed to the 2.1% when Bank of England Governor Mark Carney promised higher not lower Bank and hence mortgage rates with his Forward Guidance. Up is indeed the new down for him.

Is financial advice from Bank of England Governor’s and indeed Prime Ministers subject to miss-selling rules?


The advent of negative interest-rates was something which was supposed to be temporary just like zero interest-rates or ZIRP. Whereas in reality just like the 0.5% emergency Bank Rate in the UK which has lasted over 7 years they look ever more permanent. For example we were told that Denmark would be moving away from them as 2015 moved to 2016 whereas I note this today from Bloomberg.

Most private-sector forecasters don’t expect Denmark’s central bank to go positive again until 2018 at the earliest

Also we have an official denial of problems from the Governor of the Nationalbanken.

There’s no sharp, disruptive movement when you pass below zero.

Regular readers will be aware that official denials invariable spell in Taylor Swift speak “trouble,trouble,trouble” and once we are past the official denials we see my themes appear.

Conversations in Copenhagen these days turn quickly to real estate.

Really? Why?

There’s no question negative rates have driven up the price of owning a piece of this urban vitality. Apartment prices per square meter soared 43 percent between the start of 2010 and the end of 2015, according to real estate broker Home; in early May the International Monetary Fund urged the government to rein in Danish house prices.

We see sign of estate agents having been busy with “urban vitality” a bit like calling some of Battersea, South Chelsea or how Stockwell is in urban myth St. Ockwell. So first-time buyers of property in Denmark will have seen “disruptive movement”. Oh and this made me smile.

Real estate players also argue that Danes, temperamentally, are a risk-averse bunch—especially with memories of a 2008 property crash still fresh

Please run me by how they had a crash then?

There is more.

DSV…found itself in a tricky situation in November, when it sold 5 billion kroner ($750 million) of shares to fund a takeover of rival UTi Worldwide. Short of renting a huge vault, that meant sitting on most of the proceeds at negative rates until the deal was finalized in January, at a cost of about 4 million kroner.

The Wall Street Journal notes that in fact low interest-rates may have caused problems perhaps they might send a copy to the Governor of the Nationalbanken.

Why Aren’t Low Rates Working? Blame Dividends
Since the Federal Reserve took rates to near zero, companies have boosted buybacks 194%.

Lest we forget

On this day in 1944 my grandfather amongst others was on a trip to Germany via France.

Denmark teaches us some more about the impact of negative interest-rates

Today i wish to travel across the bridge which becomes a tunnel that is the engineering marvel which connects my subject of yesterday Sweden to my subject of today Denmark. There is also something else which connects these two Nordic nations which is that they have been forerunners in the central banking experiment of negative interest-rates Indeed as Bloomberg reminds us Denmark was the crash test dummy.

The DCB — or Danmarks Nationalbank — first cut its policy rate below zero in July 2012 in a bid to fulfill its sole mandate, which is to defend the krone’s peg to the euro.

This reminds us that the outbreak of negative interest-rates is driven by external influences on the economy. It is not internal economic developments as much as the exchange-rate and in particular the one with the Euro which drives matters here. This is explicit policy in Denmark which is one which the Riksbank in Sweden has chosen to copy. Actually 2015 was a year of two halves for the Nationalbanken as its latest Monetary Review informs us.

Total intervention sales of foreign exchange for kroner by Danmarks Nationalbank have amounted to kr. 230 billion since April. Net intervention purchases at the beginning of the year reached kr. 275 billion.

So up was the new down leading to not far off-balance in the end. However it looks at interest-rates like this and it is referring to the interest-rate cut by the European Central Bank in December.

This meant that the monetary policy spread between Danmarks Nationalbank’s rate of interest on certificates of deposit and the ECB’s deposit rate narrowed from -0.55 to -0.45 percentage point.

This means that in effect the Nationalbanken has mostly delegated monetary policy to Frankfurt as the ECB policies of interest-rate cuts, ever more QE and open mouth operations to lower the Euro put pressure on the exchange-rate and its mandate. That will lead to some fun Thursday week when the ECB eases again and the Danes find themselves having to join it as its version of the Beatles Yellow Submarine heads for the depths.

The impact of negative interest-rates

The Governor of the Nationalbanken Lars Rohde was interviewed in Shanghai on Sunday and Bloomberg have released this. Let me rearrange their order and start with his main priority.

Rohde warned that the longer-term impact of negative rates on the banking system and its profitability must be borne in mind.

Indeed he pointed out that there had been a plan in place to preserve the banks.

From the first use of a negative deposit rate, Denmark implemented a threshold for banks’ excess funds and required that they only pay the negative rate above that line. That didn’t diminish the effectiveness of the policy but meant bank profitability didn’t suffer unduly, he said……..Last year the Danish banking system had its most profitable year since 2008.

Sadly there were no such plans for the average Dane or as we should perhaps now call them banking serfs. There was some relief that they had not indulged in a dash for cash though.

What we didn’t know was where the boundary is, and the good news is that we haven’t found it,” Rohde said. “We haven’t seen any unusual rise in outstanding notes, the system is working the way we expected. Basically, it’s not different from having a low positive interest rate.”

The economy

Lars Rhode is keen to sing the praises of his policy.

One should acknowledge that monetary policy has supported growth and inflation to a large degree,

If it has done so then the prospects in Denmark must have been pretty grim as this is the latest outcome reported by Xinhua News.

Denmark’s gross domestic product (GDP) rose 1.2 percent in 2015 year on year, less than previous predictions, official data showed on Monday……..Moreover, the country’s GDP in the fourth quarter of 2015 increased by 0.2 percent compared to the previous quarter.

This was a disappointment compared to the 2% forecast by the central bank at the beginning of the year. It is also quite a contrast to the news from Sweden only yesterday and makes us wonder how much of the GDP growth there is due to the negative interest-rate policy which is seeing a quite different result in Denmark.

The unemployment situation is good compared to Denmark’s peers with yesterday’s update telling us that it is 4.4%. However if economic growth continues to underperform there must be doubts about this.

Employment is expected to rise by almost 65,000 from the 3rd quarter of this year to the 4th quarter of 2017,

What about debt?

On the surface the situation looks good because in terms of public debt the situation in Denmark is strong. Nonetheless it seems to be imposing a dose of austerity on itself as it again mirrors Euro area policy.

The agreed Finance Act for 2016 involves tightening of fiscal policy, which is appropriate in the current economic environment.

This gets more surprising as we note the actual situation according to the central bank.

The ratings are supported by the low government debt, which fell to 22 per cent of GDP in 2015 as a result of a government budget surplus.

Any problems are not being caused by the cost of borrowing either as it averaged 0.3% in 2015.

Also if we look to the external position then it looks strong too.

Since 1990, the current account of Denmark has shown a surplus, which is currently almost 8 per cent of GDP.

We have something awkward here because Denmark has in effect been exporting deflation for decades along the lines of the German economic model which provides another insight to an economic policy based on an exchange-rate. It would help its neighbours if it’s government borrowed a bit which it can do cheaply and it consumed and imported more.

Private debt

Here is a completely different emphasis on the so far parsimonious Danes. Here are some excerpts from the Financial Stability Report which highlight the issue.

Households have large debts, predominantly at variable rates of interest,

The accompanying chart shows a total just shy of 2 trillion Danish Kroner which is interesting as the Danish mortgage association thinks it is 2.5 trillion,still what’s 500 billion between friends? Also this is true.

The credit institutions have considerable lending to homeowners with high debt ratios. In this analysis, having a high debt ratio is defined as having debt that is larger than the value of the home and at least four times higher than the family’s annual income before tax….In 2013, the debt of homeowners with high debt ratios exceeded kr. 200 billion,

Typically the central bank is much more worried about the impact of this on the banks than it is on the borrowers or banking serfs.

Banks and mortgage banks have substantial direct exposures to the housing market. Their total domestic lending to households for housing purposes amounts to just under kr. 1,750 billion, or approximately 90 per cent of GDP.

If we move to the mortgage rate position then we see some intriguing trends. The short mortgage rate has veered as low as -0.32% but sometimes been positive but the long mortgage rate fell to 2.13% but then rose to 3.16%. No wonder the Danes have been remortgaging to lock in their position! These numbers are from the Danish mortgage association and only take us to November when there is some logic to the position as the Nationalbanken Forward Guidance was for interest-rate increases in yet another calamity for the concept. I suspect that the situation now is different.


To misquote the song there is nothing like a Dane! In central banking terms this may well prove to be true next week as they find themselves having to quickly reverse an interest-rate rise yet again! Even worse was the fact that back on the 8th of January they only had the courage to raise interest-rates by an inconsequential 0.1% where the costs of change surely outweighed the benefits. There will be no-one more interested in the news from the ECB next Thursday than the Nationalbanken in its bunker.

As to economic prospects we have seen more disappointing manufacturing surveys for the UK and the Euro area which poses a question for Denmark’s prospects. This adds to a disappointing trajectory and an odd mixture of flat-out monetary policy and the opposite in terms of fiscal policy. Even Mark Carney of the Bank of England is on the case.

Monetary stimulus is more effective if, in a deflationary environment, other policies can also give households and firms the confidence that global reflation is in prospect.

But I will leave you with two thoughts. Firstly whilst there have been some negative mortgage-rates in Denmark negative interest-rates have again coincided with some later rises in rates. Secondly they rely on the principle below that we can borrow from the future pretty much forever. How does that work exactly?

allowing monetary policy to bring forward spending from future incomes that are real and not ephemeral.





How low can interest-rates go?

The subject of negative interest-rates has been a theme of this website since back in 2010. It is also pleasing that the two main candidates from back then ( Bank of Japan and the European Central Bank ) have indeed plunged into the icy depths having official interest-rates of -0.3% and -0.1% respectively. Added to these we have seen nations on the periphery of the Euro area forced to join the club such as Sweden,Denmark and Switzerland. You can debate which has the lowest interest-rate as whilst the headline in Switzerland is -0.75% compared to Sweden’s -0.35% the Riksbank has set a deposit rate of -1.1%.

A Problem

In essence it is not working. The issue is complex as the central banks involved are invariably using other methods too such as QE (Quantitative Easing) or currency intervention. However if we look at Japan then Governor Kuroda would have expected a higher level for the equity market and a lower level for the exchange-rate of the Yen. What he has got is a Nikkei 225 falling this morning to 15,713 and a Yen which has strengthened through 115 versus the US Dollar. If we look at it versus the UK Pound £ then the initial effect was to weaken the Yen as it moved from 170 being required to buy a Pound £ to 173. But that reversed and it is now 116.4

The situation in the Euro area is that there has been an improvement in terms of economic growth but a relatively weak one when you consider that it has thrown the monetary equivalent of the kitchen sink at it! Or as we shall see in a bit what we thought was the kitchen sink. Also it finds itself mulling a measure of inflationary expectations that yesterday was worse than when it began its 60 billion Euros of QE a month in January 2015. Not much bang for your buck there.

Lower interest-rates are supposed to stimulate an economy however I have regularly argued on here that around the 1.5% area the effect fades and may well head the other way. So we have the risk that what is badged as a stimulus is in fact deflationary. Putting it another way consumers and workers decide to sing along with the Who.

Then I’ll get on my knees and pray
We don’t get fooled again
No, no!

What is next?

Those who feared a race to the bottom on interest-rates have received quite a bit of grist to their mill over the past couple of days. The Jefferies strategist David Zervos opened the bidding on Monday on Bloomberg.

Looking ahead, I am not sure how quickly Mario [Draghi] and Haruhiko [Kuroda] will come to the conclusion that purchases need to be in the multiple hundreds of billions per month, and nominal short rates need to be LESS than MINUS 1 percent.”

I suggest when reading such thoughts you put this song by Andrea True Connection on.

More, more, more
How do you like it, how do you like it
More, more, more
How do you like it, how do you like it

Of course the ECB had already hinted promised and teased about an interest-rate cut in March. May I just point out the insanity of a 0.1% cut when 5% lower has not worked ( as otherwise why is more needed?). Anyway JP Morgan have leapt into the breach and suggested not only a cut to -0.5% in March but a further one to -0.7% in June. If you think about it then why not cut straight to -0.7%? Apparently highly paid strategists are not as talented as we are often told. Or they are admitting that this is in effect a Public Relations exercise.

At what level do we see real change?

It was thought in the past that even dipping a toe into the world of negative interest-rates would lead to a switch back towards cash. So far even as low as -0.75% this has not happened according to Denmark’s Nationalbanken.

Currently, there are no indications that negative interest rates have led to abnormal demand for cash. This indicates that the lower bound on monetary policy rates in Denmark is below the current level of the rate of interest on certificates of deposit of -0.75 per cent.

Yes that is the same lower bound that Bank of England Governor Mark Carney told us was at 0.5% before yet another u-turn. However there is a significant addition to this.

In this context, it is important that household deposits have not moved into negative territory.

So the move is going to work by not affecting most people? My argument gets reinforcement as does the idea of there being a type of what was called a liquidity trap being in play. Please note this as you will see in a minute that the proposed solution is that even fewer economic agents are affected.

The lower bound gets lower

JP Morgan have via Bloomberg suggested that official interest-rates could go much lower.

On that basis, they estimate if the ECB just focused on reserves equivalent to 2 percent of gross domestic product it could slice the rate it charges on bank deposits to minus 4.5 percent.

Okay and could everyone do that? Apparently not.

The Bank of Japan’s lower bound on a similar basis may be minus 3.45 percent, while Sweden’s is likely minus 3.27 percent, the economists said. Should they also go negative, the Fed could cut to minus 1.3 percent and the Bank of England to minus 2.69 percent in JPMorgan’s view, reflecting how the ratio of reserves to assets is higher in their economies than elsewhere.

There are two obvious flaws in what looks like the sort of cunning plan that may have been constructed by Baldrick from the television series Blackadder. Firstly narrowing the scope of the negative interest-rate regime means that it is even less likely to work. Secondly what if the amount of reserves changes in response to the new interest-rate? Central bankers could end up like a dog chasing its tail with the difference that dogs have the sense to stop this game after a while, whereas I am not so confident about central bankers.

Also central bankers place a lot of emphasis on Open Mouth Operations and confidence as expressed in Forward Guidance well how will this work for Mario Draghi if he cuts to -4.5%?

And now we are at the lower bound, where technical adjustments are not going to be possible any longer.

That lower bound was at -0.2% which of course has already been breached.

The United States

There are calls for negative interest-rates there too. But there may well be a problem according to Bloomberg.

Most notably, it is not at all clear that the Federal Reserve Act permits negative IOER rates, and more staff analysis would be needed to establish the Federal Reserve’s authority in this area.

Oh well I guess we might find a new act on its way….


There is much to consider and let me remind readers that it is my opinion that we will see the sort of response to negative interest-rates that everyone is afraid of – a dash to cash – at around 2%. This estimate is based on the costs of this and human psychology and inertia. However that assumes that there is cash to dash to and as I pointed out a week ago the establishment is on the case. From Harvard University.

Our proposal is to eliminate high denomination, high value currency notes, such as the €500 note, the $100 bill, the CHF1,000 note and the £50 note.

The justification is familiar.

Global financial crime flows are estimated to amount to over US$2tr per year. Corruption amounts to another US$1tr.

What they fail to address is the fact that most of the corruption and financial crime starts at the top these days! So their arrow will miss the target but not us.

Meanwhile the plan is to cut interest-rates ever lower and to make sure that the banks are not too badly affected by it . Yes it is always the banks. Meanwhile it troubles nobody seemingly apart from me that you only have higher doses of medicines which work not ones which fail. Anyway here is a song from The Cranberries for the latest proposals.

In your head, in your head
Zombie, zombie, zombie
Hey, hey
What’s in your head, in your head?
Zombie, zombie, zombie

In response to a request in the comments I have been looking at forums, does anyone have any thoughts on Simple Press?



What is the impact of negative interest-rates?

If I look back I note that the prospect of negative interest-rates has been a theme of this blog since 2010. Back then I was in a minority considering the issue but now of course we have a reality which cannot be ignored which is centered on the Euro area with the European Central Bank (ECB) having a deposit rate of -0.3%. This applies as of yesterday to some 775 billion Euro’s in the deposit and current accounts of the ECB. Such a reality has had quit an impact on the countries surrounding the Euro are as we see that Sweden has an official interest-rate of -0.35% and Switzerland of -0.75%. There is also Denmark which has a central bank which is so nervous of what might happen that it raised interest-rates by a mere 0.1% last week.

The monetary policy rate spread to the euro area is thereby narrowed from -0.45 to -0.35 percentage point.

You may note that the new interest-rate of -0.65% was defined with reference to the Euro as we wonder if anyone particularly took much notice outside the boardroom of the Nationalbanken. Not perhaps the Swedish Riksbank as I note speculation today that it will cut again to 0.5%. So what have we learnt and what are the consequences?

A dash to cash?

There were theories before negative interest-rates became a reality that there would be cash hording because currency has a 0% interest-rate. However we can now say that there have been few i any signs of this so far. The one dash for cash in 2015 was seen in the Euro area but it was driven by fears of possible haircuts at Greek banks rather than negative interest-rates.

So we see that at interest-rates down to 0.75% there seems to be little or no effect. Whether the fact that the Scandinavian countries are in the van of using less cash and more electronic forms of payment is an influence is hard to say. But we can be sure that central bankers around the world will have watched this development. Stanley Fischer of the US Federal Reserve certainly has been.

Cash holdings have not risen significantly in these countries, in part because of nonnegligible costs of insuring, storing, and transporting physical cash…. It is unclear how low policy rates can go before cash holdings rise or other problems intensify.

As to the begged question I would say between -1% and -2% I would expect more of an effect.

Bond Yields

This is something that was not thought through at all well before the credit crunch hit. But many bonds in the European scene have seen negative yields with estimates hitting the 3 trillion Euro mark. As I type this even Italy is on the threshold (0.01%) at the 2 year maturity and Germany is at -0.14% even at the five-year maturity. In Switzerland even the 10 year yield is negative (-0.13%) as we see that in essence its bond market has seen not far off a replacement of positive yields by negative ones.

This development has heavily influenced the financial landscape in Europe and indeed the rest of the world. This is because those looking for positive yield have found themselves looking at UK Gilts and US Treasuries. In my opinion this is one of the reasons why yields in those two countries have not risen and in some cases fallen giving them rather extraordinary yield patterns if you compare them to economic developments. Another credit crunch first.

However things just like in the cash or currency world have not developed as one might have expected. In fact bond markets with negative yields have seen more and not less demand at times in a type of perverse or inverse demand curve. Why? I think that this has been driven by overseas investors where 2 other factors have swamped the prospect of a yield loss. The first is currency expectations and the second is fears of haircuts in other banking sectors. After all if you were Russian, Ukrainian or more surprisingly perhaps Australian or Canadian then currency movements in 2015 were a much bigger influence than any negative yield.

We also have the issue of QE which has been used to drive bond yields lower at the same time. This makes me wonder if we will ever have negative interest-rates in a non-QE world as well as with the reluctance of countries to reverse QE whether it will be permanent or at least permanent in most of our lifetimes.

Links to the real economy

Here we have had some connections but in a rather familiar theme some disconnections.

Asset Prices

Well the clearest case here of what might be a typical Eurovision entry of “bang boom boom” has been demonstrated by house prices in Sweden. From Sweden Statistics this morning.

Real estate prices for one- or two-dwelling buildings increased by more than 2 percent during the fourth quarter 2015, compared to the third quarter. Prices increased by more than 11 percent on an annual basis during the last quarter, compared to the same period last year.

As ever in such a situation the heat is on in the cities and three municipalities are reporting annual increases of over 20%.

The situation with equity prices is more complex with a myriad of issues not least the falls in 2016 so far. But as I type this the Eurofirst 300 equit index is at 1317 or around 70 points lower than when the ECB make the fateful decision to go negative with its deposit rate.

What about interest-rates for the common (wo)man?

This has been intriguing and is one of the reasons why there has not been a major dash for cash. The impact of negative interest-rates on deposits has mostly only affected institutional depositors as well as those individual’s with very large deposits. One small Swiss bank has dipped its toe into spreading this to more ordinary depositors in 2016 so we wait to see if more join. But so far negative interest-rate have not replaced near zero ones. Ironically 2016 has seen quite a few deposit and savings rates reductions in the UK where we were supposed according to Bank of England Governor Mark Carney to be getting higher interest-rates!

Mortgage rates

These initially generated some headlines as some headed towards zero and flirted with below it. However I will let Andréa M. Maechler of the Swiss National Bank take up the story.

While the introduction of the negative interest rate caused interest rates on the money and capital markets to decline, mortgage rates did not decrease to the same extent. Indeed, for long-term mortgages, interest rates are slightly higher than they were at the beginning of the year.

Then we get an admission of something we can take credit for discussing on here.

As a result, banks’ interest margins have come under pressure.1 To partially offset this effect, banks have raised their mortgage interest rates

As yes monetary policy by the banks for the banks of the banks and so on….

Economic growth

This again is a cloudy picture. We have the good and also the bad shown below.

The strong economic development in Sweden continued during the third quarter when GDP rose by 0.8 percent, seasonally adjusted.

Denmark: Gross domestic product fell 0.4 percent sequentially, larger than a 0.1 percent fall estimated in November and reversing a 0.2 percent expansion seen in the second quarter. (h/t RTTnews )

As you can not much light is shed by that as even the Nordics are seeing very different results from similar medicine.


As you can see this is another clear fail for the text books of economics. Although we are not as irrational as some may claim as they try to cover their tracks. But we do need in my opinion to take the advice of “You’re the one that I want” from Grease even if we don’t want them.

You better shape up, you better understand

Because if 2016 continues on its current trajectory we may well be seeing more of them and if not well we return to the issue of what central banks do when the economic cycle turns to recession again? After all the mantra is very activist these days.





Denmark’s economy waits for the next move of Mario Draghi and the ECB

One of the features of our time is that politicians like to put up other countries as models for their own. Sadly for the model country that often represents a peak and the only way then is down to misquote Yazz. Rather oddly Denmark has appeared in the race for the Democratic nomination in the United States as Bernie Saunders has been praising it as a socialist utopia and Hilary Clinton also praising it. The Danish Prime Minister took the time and trouble to rebut this in a speech at Harvard.

I know that some people in the US associate the Nordic model with some sort of socialism. Therefore I would like to make one thing clear. Denmark is far from a socialist planned economy. Denmark is a market economy.

Of course as leader of a centre-right coalition he was always likely to say that. Rather intriguingly he went on to say this.

Denmark is sometimes compared to a bumblebee—at first sight it seems almost impossible that a bumblebee would be able to fly, but it does,

Some good news for Denmark

The Legatum Prosperity Index told us this earlier this week.

Denmark ranks 3rd globally in the 2015 Prosperity Index, having risen by one place since last year.
Denmark’s best performance is in the Entrepreneurship & Opportunity sub-index, where it ranks 2nd in 2015.
Denmark’s lowest rank is in the Health sub-index, where it ranks 16thin 2015.

Last week the World Bank was issuing praise as well. The Danish government reported it thus.

Denmark moves into the top 3 in the World Bank’s ‘Doing Business’ ranking published today.

Perhaps these organisations are fans of Fat Boy Slim.

I have to praise you
I have to praise you
I have to praise you
I have to praise you like I should

If we look into the detail of the Legatum Report then Denmark had in the previous 5 years  per capita GDP growth of -1.1%. Now 2013 is a bit out of date but poses a question and further research poses other questions.

While many other advanced economies have made progress on the Economy sub-index since 2009, the Nordics have been going backwards. Three of the five Nordic countries have slipped down the Economy sub-index rankings since 2009.

Looking at Denmark specifically whilst its unemployment rate has fallen it has done so more slowly than the UK and whereas pre credit crunch it had a lower unemployment rate it is now higher. Interestingly the Lego Group is doing well expanding and creating jobs. Can it help? Yes but it is mostly doing this according to its update.

The factory in Mexico is planned to undergo a massive expansion, adding up to 190,000m2 to the factory……The LEGO factory in Nyíregyháza, Hungary, is also planned to undergo significant expansions.

Mimicking the Japanese model?

The Bumblebee

Currency Peg

Denmark has a sort of semi-detached relationship with the Euro as it has a currency peg. So as I pointed out at the time the Danish Kroner will have been pulled downwards just over a week ago when the “Open Mouth Operations” of Mario Draghi talked the Euro lower. This is back on the agenda this morning as the Euro dips into the 1.09s versus the US Dollar taking the Kroner with it. So whether the like it or not the Danes have found themselves with a depreciating exchange rate courtesy of the ECB.

If we switch to strains in the exchange-rate with the Euro then the Nationalbanken had been able to reverse around 2/3rds of the intervention it had made around the turn of the year. Except we now see that the Kroner is dipping again in response to the recent Draghi promises. Is there a Lego version of what is being called Draghi’s christmas train?

The currency peg has become ingrained as a way of life in Denmark but if it did not exist would you start one now? I would suspect not although of course there are always going to be issues being so economically close to the troubled behemoth which is the Euro.

Negative Interest-Rates

One of the ways that Denmark stabilised its currency earlier this year was to cut interest-rates. It had several goes before agreeing with Switzerland that -0.75% was the way to do it. Accordingly Nationalbanken members may have got some of their breakfast bacon caught in their throat or spluttered into their coffee as they read Mario Draghi’s interview with Il Sole 24 Ore. if he does carry out the hints of further deposit-rate cuts then Denmark will find itself moving towards and maybe reaching -1%.

The Danish government bond market has also been affected and the two year yield is -0.08% so it is yet another country which is being paid to borrow which is presumably why it issued a 2018 bond earlier this month. In a way the fact that a bond with a 0.25% coupon replaced one that had a 2.5% one speaks volumes.

The housing market

If you slash interest-rates into the icy cold negative zone then you risk trouble and the latest review from the Nationalbanken suggests it is worried.

House prices are forecast to rise by 6 per cent
this year, and much of this increase has already
taken place

Indeed you may spot below the use of a word that has been redacted from most central banking dictionaries and lexicons.

price increases for owner-occupied homes remain high. The highest increases have occurred in the Copenhagen area and to a slightly lesser extent in other cities. Especially the rate of price increase for homes in certain parts of the Copenhagen area is unsustainable, and there is a risk of a local house price bubble.

The banks do seem able to lend for at least one purpose.

Total lending by banks and mortgage banks to
households and non-financial corporations grew
by kr. 17 billion from March to July.
The increase is mainly attributable to lending
by mortgage banks to households.

There has been something of a boom bust cycle already in the price of owner occupied flats as the 100 of 2006 fell to below 75 in 2009 and the trod water. However things picked up in 2012 around the time of the “whatever it takes” speech and now if I am reading the chart correctly we are around 104.

What happens next? Well we do get a hint.

This indicates that the low interest rates have not yet been fully factored into house prices.


If we continue with the animal imagery then the Danish economy has some of the features of a Swan because if we peruse the quote below after seeing all the international praise all looks calm.

GDP was 1.7 per cent higher in
the 1st half of 2015 than one year earlier.

Yet if we move to the currency and interest-rate situation we get a very different emphasis because a stable serene Swan does not need negative interest-rates. Is there a type of Swan event which covers this? Well if interest-rates get forced lower and house prices pushed higher then it will be time for the delightful Taylor Swift.

I knew you were trouble when you walked in
So shame on me now
Flew me to places I’d never been
Now I’m lying on the cold hard ground
Oh, oh, trouble, trouble, trouble
Oh, oh, trouble, trouble, trouble

Update midday

I note that the UK current account is hitting the newswires a bit today so here again is a link to my critique of the data series and methodology.

Mario Draghi “It’s no use going back to yesterday, because I was a different person then.”

Let me open today with what was a response to the Press Conference of Mario Draghi and the European Central Bank from me on Twitter.

Right now the and Swiss National Bank are rubbing Mario Draghi off their Christmas card list!

So he had not made any friends in Sweden,Denmark and Switzerland and if any of them play darts then a picture of his face may now be on the dartboard. Interestingly there had been no policy moves by the ECB so Mario had deployed Open Mouth Operations or Forward Guidance. I had been discussing on Share Radio’s Global Perspectives programme earlier the issue that against the US Dollar the Euro was pretty much where it was when the QE announcement was made in January. Actually that is also true of the trade-weighted exchange-rate so it woudl appear that Mario looked into his record collection and found inspiration from Boz Scaggs.

Oooh I’m all down on my knees
Please please please
What can I say
Oooh what can I do…

What did Mario do next?

He decided to fully engage in Open Mouth Operations in the Currency Wars. The emphasis is mine.

Most notably, the strength and persistence of the factors that are currently slowing the return of inflation to levels below, but close to, 2% in the medium term require thorough analysis. In this context, the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting, when the new Eurosystem staff macroeconomic projections will be available.

Boom! You might say. Also you might be wondering why central banks go into purdah when at other times they are willing to give a clear hint and signal some two months ahead? Indeed Mario was so keen on this he told us again and for newer readers the ECB defines pretty much everything around its inflation target. It was not so long ago that a former President Jean Claude Trichet boasted about averaging 1.97%. Not now though.

there are risks….. which could further slow down the gradual increase in inflation rates towards levels closer to 2%.

What will he do?

There were two clear hints and let me open with the one I had suggested might be in the cards on Monday and yesterday.

On the interest rate on the deposit facility, I said before – , I had said it was not discussed. This time it was discussed. Further lowering of the deposit facility rate was indeed discussed,

Not only were currency markets electrified but the central banks of Sweden,Denmark and Switzerland and maybe one or two others would have had their heads in their hands and mulling the thoughts of David Bowie on their housing markets.

And I’ve been putting out fire
With gasoline

But Mario was not finished as he also hinted at some more QE. Apparently 60 billion Euros  a month does not buy you much these days so Mario may well do more. This seems the most likely to me and the emphasis is mine.

These purchases are intended to run until the end of September 2016, or beyond, if necessary, and, in any case, until we see a sustained adjustment in the path of inflation.

Later there was rather a good question on this issue which I shall leave hanging in the air as it has been a theme on here for 5 years or so.

is there a risk that the ECB will just kind of fall into a trap of QE without end? That you keep doing it, that you keep buying government bonds?

The questioner should have remembered the film Toy Story and Buzz Lightyear. This troubled Mario Draghi so much that he woke up Vice President Constancio to help with the reply. Awkward for Victor who used to be able to have a relaxing nap at these meetings. He has been woken up twice in recent times ( and maybe more if you include the glitter throwing incident and the understandably furious Greek who rapped his shoe on the table) which is a signal of trouble on its own if you think about it.

Currency Wars redux

The Euro dropped like a stone and against the US Dollar dipped below 1.11 this morning after being above 1.13 before Mario took aim at it. If we move to the UK Pound Sterling then 1.36 became 1.38. Of course this is not even 24 hours later as I type this but we can say that there was a clear short-term change.

Such moves poses questions for the UK and US but what if you have a currency peg to the Euro? Denmark does and the Swiss have given a currency cap a go and that is why they both have interest-rates of -0.75%! On Wednesday there were rumours of Swiss National Bank intervention which replaced a period of relative calm. I suppose if you are in the game for 583 billion Swiss Francs then what’s a few more? Although of course I am not writing from the perspective of a Swiss taxpayer. So let us mark 1.08 as the exchange rate today and move on.

Bond market bonanza

Let us start with the Swiss where @acemaxx has provided a helpful chart.

Yep that does show negative yields out to 15 years. If we stop for a moment to consider this we can wonder how many finance,insurance and pension business models work in such an environment and conclude that they do not.

In the Euro area itself there has been a change in that 14 of the nations now have negative two-year bond yields with Italy and Spain joining the list for the first time according to Reuters. Oh and the two-year yield in Germany has fallen to -0.35% which means that all the research which told us that bond yields would not drop below the deposit rate can safely be filed in the recycling bin.

If we move to Denmark then we see that according to Bloomberg there had already been a change.

Economists recently surveyed by Bloomberg see negative rates continuing into 2017. That’s not necessarily because they expect rates to rise after that, but because their models just don’t go any further.

Probably for best if we consider the accuracy of long-range economic forecasts! But sadly for Bloomberg’s reporters they had not read my blog and so they took a wrong turn.

Rate cuts are improbable

Although to be fair they do much better here.

Denmark has had mostly negative interest rates since mid-2012…..Main effects have been higher asset prices, not growth

What about those crazy Swedes?

Well Myndos Capital put it succintly.

Hence, the repo rate is expected to be lowered by 10bp (to -0.45%) in December if not before.

Oh and in spite of the fact that by the end of the year the Riksbank will own 24% of the Swedish government bond market they expect more QE too. So property owners in Stockholm will let out a cheer of “thanks” which may even cross the Atlantic and reach the ears of Paul Krugman.


As we appear set to plunge even deeper into the rabbit hole of negative interest-rates there is much to consider. I consigned “lower bound” into my financial lexicon for these times a while ago but there are more nuances now and it was reminiscent of the Mad Hatters Tea Party when Mario Draghi asked himself this question yesterday.

the issue there is how come we announced a year ago that that was practically the zero lower bound and now we’re thinking of going into further negative territory?

Poor old Mark Carney is of course wounded twice by all of this. Firstly his lower bound is a “curiouser and couriouser” +0.5% and secondly his promise of an increase in UK Bank Rate. As to Mario well there is this.

“It’s no use going back to yesterday, because I was a different person then.”

As to Forward Guidance then Mark Carney is trying to be a Pied Piper for UK mortgage holders whilst Mario Draghi is playing the opposite tune. A clash of the titans?

“What a strange world we live in…Said Alice to the Queen of hearts”