Could mortgage rates here go negative? A question such as this would normally invite scorn and derision. But these are not normal times.
In an esoteric part of the weird and wonderful world of bond markets, a Danish bank has structured a 10-year mortgage product that carries a negative rate of interest. Apparently, 20-year mortgages can be had in Denmark for zero interest costs, although before you get too excited let's recall that banks often have charges that are not related to interest.
It seems that about a quarter of the world’s outstanding bonds – whether issued by governments or companies – are trading with negative yields. Buy one of these bonds and you are guaranteed to lose money.
Bloomberg estimates that something like $15 trillion (€13.2 trillion) worth of bonds are currently yielding guaranteed losses to any purchasers. In the past week, the Government offered negative returns to anyone interested in purchasing its bonds. And there are plenty of investors so interested.
Nobody understands why this has happened, although there are plenty of theories. The most common explanation lies with the observation that there are huge pools of savings out there looking for a home, preferably one that offers a decent return without putting too much capital at risk. In a world of low economic growth, it is suggested that there is a surplus of savings relative to the potentially profitable investment opportunities. Low growth implies low and fewer returns.
At best this can only be a partial explanation and begs as many questions as it answers. Why is growth so low? Would growth be higher if, rather than buying bonds, the owners of those pools of savings put them to work via old-fashioned investing, buying land, machinery and businesses? Why are savers so risk averse?
For my money, part of the explanation lies with wealth inequality. That large stock (and flow) of saving is concentrated in relatively few hands. Not many of us ever come near to making decisions about serious investing.
The owners and controllers of those savings see a world economy where the benefits of growth, such as they are, are flowing to fewer and fewer companies. Profits growth around the world is concentrated in a vanishingly small number of businesses, usually of the tech variety. If you are a wealthy individual or sovereign wealth fund, once you own a significant chunk of Facebook or Google where else are you supposed to put your money? The answer is clear: into the bond markets.
There should be many other potential homes for that money but, rightly or wrongly, decision-makers see them as too risky. That world of low growth again. It gets a bit circular, a bit self-fulfilling: if savers are reluctant to put their money to work, growth will indeed be low.
Some significant financial market players these days base their entire investment strategy around disrupters versus the disrupted. That's jargon for spotting which line of business is next to be devoured by the likes of Amazon. You buy the latter and short the former.
It’s not a form of investing that previous generations of savers would recognise and certainly not one captured by the finance textbooks. And not one conducive to boosting growth. It’s based on the notion of a near zero-sum game: technological changes generate a few winners and thousands of losers. Winner-takes-all inequality could be the biggest driver of low growth.
Of course, other reasons to fear for the economic future are also evident. Trump's trade war tops a list that must also include Brexit. Britain is now flirting with revolution of a most English kind: many of us think the union is finished.
Germany is beginning to look like an economy well equipped for the 20th century but not one that has adapted to the rapid changes witnessed over the past two decades: an economy that produces superb, often diesel-powered, cars that all of a sudden fewer people want. A country with the best engineers but not of the software variety.
Failure to put savings to productive use makes sense if investment opportunities are indeed fewer or just too risky. It seems more likely to me that it’s just an old-fashioned instance of market failure. Private markets are not allocating capital nearly as efficiently as they should. That’s a necessary and sufficient reason for government action.
Any government facing overwhelming demand for its bonds should give the market what it wants. Borrow much more and spend – invest – where private markets fear to tread. The crying need for infrastructure investment in so many countries is an obvious place to start. Deficit scolds will immediately argue that this raises the risk of too much debt, something that we have recent experience of. This misses a deeper point: those weird negative bond yields are screaming that there is, today, too little debt.
Negative mortgage rates could happen if the worst fears about secular stagnation are realised. Householders may cheer the prospect of being paid to borrow but they won’t enjoy the accompanying falls in house prices that economic stagnation would bring about. Someone has to start investing, properly, for that to be averted.