Investing

Danish bank offers mortgage lending for negative 0.5% per year

  • Last Updated:
  • Aug 19th, 2019 6:52 pm
[OP]
Newbie
Jun 17, 2018
23 posts
12 upvotes

Danish bank offers mortgage lending for negative 0.5% per year

Most of us I assume have read about the piles of negative-yielding sovereign bonds in Europe and Japan.
This article says a quarter of sovereign bonds now have negative yields: https://www.economist.com/finance-and-e ... for-safety
As confusing as it may seem, I feel like this could be explained by a combination of a) governments trying to stimulate the economy through quantitative easing, b) flight to safety, and even possibly c) speculation as to yields going even lower.

Now this Danish bank (Jyske Realkredit) pays borrowers 0.5% per annum to borrow against their real estate. Now to me this is just baffling. How could flight to safety possibly explain this?
https://finance.yahoo.com/video/denmark ... 51531.html

If this bank wants to earn a spread, it would have to get financing at an ever lower rate, eg borrowing at negative 1.5% and lending at negative 0.5%... That doesn't look possible, as investors could buy more liquid government-issued bonds now yielding between -0.9% and -0.4%: http://www.worldgovernmentbonds.com/country/denmark/
Four days ago they issued 0%-yielding obligation, due in 2040: https://jyskerealkredit.com/announcemen ... ddea74c947
Isn't this very unsustainable? Borrowing long-term at 0% and lending medium-term at -0.5%... Could they just be speculating on rising rates and want to lock in cheap financing?

Is anybody able to make any sense out of this?
1 reply
Deal Fanatic
User avatar
Dec 14, 2010
5444 posts
5558 upvotes
The negative mortgage rates being offered now aren't meant to finance an entire home purchase. They are intended to be supplemental loans that can be used for home repairs and upgrades or to pay off debts with higher rates. Banks in Denmark are willing to take a small loss rather than risking borrowers taking out higher interest loans that they won't be able to pay back in the future. Banks in Europe are not doing great.

The negative bond yield in Europe is not attractive to investors. That's why there's such a flow to US bond funds, US physical bonds and US corporate bonds. It's being criticized because instead of allowing that same dollar to be spent multiple times increasing money velocity, it might backfire by having people hoarding cash and not spending (which is happening in Japan for the last 30 years) or simply flee to investments in countries that continue to operate traditionally by paying you something if you will lend your money to them.


Rod
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