8.16.2019 Weekly Update: An Inverted Curve for an Inverted World
by Zach Marsh on Aug 16, 2019
S&P 500 -0.96%
10 Year Treasury +1.32%
Weekly Update: An Inverted Curve for an Inverted World
A news item caught my attention this week, banks in Denmark are now offering negative mortgage rates. Over the past five years or so, government bonds throughout Europe and Japan have been trading with a negative yield. A few weeks back, I noted that a number of junk bonds in Europe are now trading at a negative yield. Now, banks in Denmark are offering negative mortgage rates.
The concept is almost too strange to comprehend—banks are paying you, if you are Danish, to lend you money. Since I’m in the process of refinancing my mortgage now, for laughs I tried calculating what that would mean if I refinanced with a negative rate, but my loan calculator app couldn’t process the concept of negative rates either. Perhaps this might lead to another Y2K problem for banks—all the systems will collapse when the entire world is turned upside down, and people pay other people to risk money by lending them money. In a normal world we invest money, i.e. assume risk, with the prospect of reaping a return. Now, it seems, some are saying “To hell with the return, just give me the risk and a guaranteed loss.”
The talk of negative rates is even starting to creep into the financial news media here in the U.S. This month, US Treasury bond rates have plummeted. Yields on the 10 year US Treasury Note have fallen about 0.50% in just two weeks. This week the yield on the 10 year note fell below the yield on the 2 year Treasury note for the first time since before the financial crisis. When the 10 year yield is less than the 2 year yield the curve is said to be inverted. An inverted yield curve has preceded the last 4 recessions, now causing many analysts to start raising their forecasted risk for recession in the next 12 months. Certainly, the inverted curve is enough to start causing concern, but maybe we are confusing the symptom with the ailment. Perhaps we are going to have to reassess the entire outlook for the global economy. And perhaps, the negative yields around the world are just another symptom of a growing issue.
Every so often there is a seismic shift in the world which forces us to change our entire outlook. In the ‘70’s OPEC changed our beliefs in a cheap energy world and caused massive disruptions to our economy at home. In 2008, we had to reassess our beliefs in the safety and security of our financial system. Now, given the trade wars and rise of protectionist policies, we are having to reassess what the new world will look like.
The world is clearly shifting. Europe and Japan’s struggles seem inextricably linked to demographics. In a country where the population is declining how can we expect anything except deflation. At home, we too are battling a demographics and the political divide has been exacerbated as a result. Southeast Asia seems to be the one area with demographics on its side. As the center of the economic world shifts from West to East, the US and China are battling for control/survival atop the totem pole. I don’t foresee this resolving soon, even if we get some short-term trade resolution.
Maybe related, maybe not, the Wall Street Journal had a story in this morning’s paper about the Trump presidency exploring the possibility of purchasing Greenland. It seems Greenland possesses some strategic military significance and to prevent China from gaining access to it Trump believes that acquiring it from Denmark could be beneficial. I have no idea about the value of Greenland militarily, but I do know if I were Trump, I would ask a Danish bank for the loan.
Thanks for reading,
Zach and Dave
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