NEGATIVE INTEREST RATES

A couple of years ago, the Danish central bank issued bonds with a negative interest rate. Since negative nominal (as opposed to real) interest rates are economically bizarre, this was widely perceived to be a one- or two-off.

However, negative interest rates have come back with a vengeance and have started to filter down from the central bank and into the housing market. When someone takes out a Danish mortgage, it is usually through a credit union, which finances the deal by issuing a bond (to be precise, it funds, say, kr.100 million of mortgages by issuing a kr.100 million bond). Some of those mortgages are variable rate, meaning essentially that they are refinanced in the market every year for the life of the term. In next week's big annual refinancing, it is expected that the bonds issued will have an interest rate of minus 0,2-0,3%.

In other words, people will be being paid to borrow money. If that sounds daft, then that's because it is.

Walter Blotscher