New records in the interest rates – again

15.11.2019
Despite the summer holiday, there is more than enough to write about. The market has not been idle but it seems as if there’s more of the same, just in a more extreme way.

This writes Chief Strategist at Sparinvest, David Bakkegaard Karsbøl, in his latest monthly report.

Last month, Denmark became the first country in history where the entire treasury yield curve became negative. However, this was due to the fact that our longest issue is the 2039 loan – a 20-year bond. Now the entire German treasury yield curve has also become negative and their longest bond expires in 2048. 

In Denmark, Jyske Bank has now opened a 10-year mortgage with negative interest and 30-year 1 percent interest-only loans are very close to price 100. In Italy, the 10-year interest on government bonds has fallen from over 3.5 percent in October to under 1.5 percent.

A number of factors indicate that right now, we are in some form or other of extreme ending to a bubble in the bond market. The fact that Danish home owners can borrow over 30 years at 1 percent interest makes no sense in a risk perspective. Also, due to their length and an assumption of fairly normal interest rate fluctuations, long bonds are a ticking time bombs without any credibility and expected profit for investors.

Well, interest rates can go even lower and perhaps even more negative, but we have long since crossed the line where one must emphasize that in order to generate a return from the current levels, you have to find an even bigger "fool" to buy the bonds.

The risk of a sudden return to higher inflation expectations is also clearly present when monetary growth in both the US and the Eurozone is on the increase after a major fall in 2017-2018 and when important retail growth has almost only risen since its fall at the beginning of the year. Current levels of growth are 3.4 percent for the United States and 2.6 percent for the Eurozone. In addition, the banking systems in both regions still appear to have relaxed lending conditions and moderate to positive expectations for loan demand.

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