Author Topic: Negative interest rates take investors into surreal territory  (Read 9363 times)

Viking

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Is this where North America is headed. Do we care if negative rates are here to stay? How does this change the investment process?

https://www.ft.com/content/09360f2e-98b4-11e9-9573-ee5cbb98ed36?ftcamp=traffic/partner/feed_headline/us_yahoo/auddev&yptr=yahoo

Beginning of article: “This summer, Germany’s housing market has turned into Alice in Wonderland: the yield on five-year bonds issued by mortgage banks slid to minus 0.2 per cent, compared to a level of plus 5 per cent a decade ago.

That means investors are essentially paying for the privilege of lending money into Europe’s largest property sector. Economic logic — or gravity — has been turned on its head.

If that were not bizarre enough, consider this: in Denmark, some financial institutions are offering borrowers “negative” mortgages that pay interest; treasurers of major German companies are muttering about their bonds trading with negative yields; and yields on 10-year government bonds in France and Sweden have fallen into negative territory too, joining Germany and Japan.

Overall, the global pile of negative yielding debt has swelled above $12.5tn, breaking the record set in 2016. Even in America, the yield on 10-year Treasuries recently fell below 2 per cent. That might not look dramatic since it is still positive in nominal terms. But when adjusted for core inflation (about 2 per cent) it equates to a near-negative real rate. This is remarkable given that the US just notched up an economic growth rate of 3.1 per cent in the first quarter.”
« Last Edit: June 28, 2019, 05:09:22 PM by Viking »


no_free_lunch

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Re: Negative interest rates take investors into surreal territory
« Reply #1 on: June 28, 2019, 05:30:57 PM »
Well I will be getting a mortgage if this happens.

I think boring slow to no growth companies with large dividends should do ok. Telecom companies come to mind.  REITs could do ok. The dividend looks better and they can refinance at better rates.  Really all equities are undervalued in this case but I really like dividends as I could see investors getting desperate and bidding them up.   

I think the hard question is what does this imply for economic growth.

Packer16

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Re: Negative interest rates take investors into surreal territory
« Reply #2 on: June 28, 2019, 06:00:34 PM »
That is only the case if you assume inflation.  In a deflationary world, an inverted yield curve is normal as your money is becoming worth more the longer you hold it.

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RuleNumberOne

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Re: Negative interest rates take investors into surreal territory
« Reply #3 on: June 28, 2019, 06:33:16 PM »
In Europe, home prices have been on a tear for years. They are going up faster than Silicon Valley.

Though housing is 40% of the CPI, disgusting governments and central bankers have created  negative mortgage rates in Denmark, 0% 10-year in France, 0.5% 10-year in Portugal and Spain.

All these countries have zooming house prices. Faked inflation numbers have given central bankers an excuse to blow a housing bubble, just like they did in the US in 2008.

How do they report 0.5% inflation when the biggest CPI component is climbing 7% a year? "Imputed Rents"

alpha

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Re: Negative interest rates take investors into surreal territory
« Reply #4 on: June 28, 2019, 11:00:53 PM »
Anyone catch when Munger commented about interest rates at this years AGM? He basically said they were abnormally low and would soon normalize.

John Hjorth

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Re: Negative interest rates take investors into surreal territory
« Reply #5 on: June 29, 2019, 01:11:17 AM »
I see Denmark mentioned in the quote by Viking in the starting post in this topic.

This post is about my personal perception of Danish interest rate conditions, based on my actual cursory knowledge about the Danish market for mortgage bonds etc.

Finans Danmark : Bond rates.

Translation of legend :

Red: Short Euro rate
Brown : Short rate [DKK]
Grey [sort of] : Long rate [likely DKK]

So the long [likely 30 years] fixed interest rate is right now 1.647 %. On top of that you have to pay a spread of ~1 % to the mortgage institution, in Danish "reservefondsbidrag" [translates to "reserve fund contribution"], which is the mortgage institutions running earnings on the mortgage. The spread can be a bit lower, based on your rating.

Mortgages with variable interest are typically rolled over after 1, 3 or 5 years. In Danish called "flexloans" - F1, F3 or F5. Refinancing rates are set under bond auctions at certain dates. What happens if the Danish mortgage bond market is - perhaps more or less - frozen at the dates of the future auctions? What happened to GGP comes to mind here.

To buy a home with mortgage [generally max. 80 % in mortgage] you have to have 5 % of the price as available cash, which can't be borrowed money, and after all other personal debt deducted [I think student loans in this particular calculation is excluded though.]

Based on your personal budget and a standardized minimum available amount of money for consumption based on the household composition, you are eligible for the mortgage for the house, if you can afford a mortgage with repayments over 30 years [likely depending on your age also] with fixed rate. [In this budget you naturally have to include the load of repayment of student loans.]

This practice is set by the Danish FSA - so to say as a "soft", but still de facto standard, meaning your bank can provide the last 15 % of the price as second layer financing, if it's willing to make a loan provision for the deviation.

I'm not up to date on the actual standards for minimum available amount of money for consumption for now some years, but last time I asked about it, I was surprised how high they were.

You can opt for a "punch card" on your mortgage with ten punches [each punch is a year without repayment, subject to that the mortgage is held within agreed duration], if the economic situation for the total household changes to the worse, compared to the budget [unemployment etc.].

This practice makes a lot of sense to me.

So the "free" debt, that really isn't free [but still cheap], is certainly not available for everybody here in Denmark.
« Last Edit: June 29, 2019, 05:15:27 AM by John Hjorth »
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Spekulatius

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Re: Negative interest rates take investors into surreal territory
« Reply #6 on: June 29, 2019, 06:50:05 AM »
^ the above provisions seem easier than the provisions for a conforming mortgage in the US. However on the other hand, who is going to say that with a 1.6% interest rate, a 2.5% cap rate isn’t reasonable? This would presumably make the interest cost of a home the same than owning, even if you include the cost of maintaining the house (~1% of purchase price).

There ar pretty cheap (relative to NAV) real estate stocks one can buy in the UK for example. U.K. will probably follow down the EU it’s interest rates over time.

Of course banks and life insurance companies are screwed.
To be a realist, one has to believe in miracles.

RuleNumberOne

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Re: Negative interest rates take investors into surreal territory
« Reply #7 on: June 29, 2019, 08:07:53 AM »
10% home price rise with an 80% mortgage, is a 50% return on investment within one year.

Draghi wants to ease even more.

Volcker has a simple suggestion: if you don't want deflation, don't blow bubbles.

^ the above provisions seem easier than the provisions for a conforming mortgage in the US. However on the other hand, who is going to say that with a 1.6% interest rate, a 2.5% cap rate isn’t reasonable? This would presumably make the interest cost of a home the same than owning, even if you include the cost of maintaining the house (~1% of purchase price).

There ar pretty cheap (relative to NAV) real estate stocks one can buy in the UK for example. U.K. will probably follow down the EU it’s interest rates over time.

Of course banks and life insurance companies are screwed.

John Hjorth

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Re: Negative interest rates take investors into surreal territory
« Reply #8 on: June 29, 2019, 09:11:22 AM »
10% home price rise with an 80% mortgage, is a 50% return on investment within one year.

Draghi wants to ease even more.

Volcker has a simple suggestion: if you don't want deflation, don't blow bubbles.

RuleNumberOne,

Perhaps I misinterpret your post here, but please try to invert your post, by assuming a 10 percent price decrease instead. Draghi & Volcker do not set market prices on real estate - buyers and sellers do.

This post is not meant condescending towards you. I assume we all know about the mechanics of the use of leverage, actually.
« Last Edit: June 29, 2019, 09:17:10 AM by John Hjorth »
”In the race of excellence … there is no finish line.”
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JimBowerman

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Re: Negative interest rates take investors into surreal territory
« Reply #9 on: June 29, 2019, 04:45:26 PM »

Draghi & Volcker do not set market prices on real estate - buyers and sellers do.


Yes, but a central bank controls the growth path of the unit of account, which is the main measuring stick for those "buyers and sellers". 

The central bank can almost completely dictate the size of the nominal economy going forward.

The below table kinda shows that housing (as % of nominal GDP) has been relatively constant.

So at a high level, can't Draghi and Volcker largely determine the nominal price of housing over a decently long time frame?

https://www.nahb.org/-/media/Sites/NAHB/research/housing-economics/housings-economic-impact/housing-contribution-gdp-q1-2019-0426.ashx?la=en&hash=DB4820E7942613C16F65F3BF6739E0462AC168EE


(Would add that there's no iron law that housing must be a fixed % of GDP - Its just that with various zoning laws, it's (imo) likely to stay relatively constant.  Without those laws, there's a (good?) chance that housing would represent an ever decreasing % of GDP, much like food has done over the last century)

https://cdn.theatlantic.com/static/mt/assets/business/1900%201950%202003.png