https://www.bloomberg.com/news/arti...ons-hit-covered-bond-market?srnd=fixed-income In the world’s biggest covered-bond market, a Danish bank says it’s now ready to sell 10-year mortgage-backed notes at a negative coupon for the first time. It’s the latest record to be set in a world that’s being dragged down by ever lower interest rates. In Denmark, where Jyske Bank A/S will offer 10-year mortgage bonds at a fixed rate of minus 0.5%, average Danes will borrow at rates far lower than those at which the U.S. government can sell its debt. Jyske Bank says it would rather not be setting such records, given the global economic weakness that’s behind the historically low interest rates. “It’s a first not only for us but for all Danish mortgage institutions,” said Christian Bech-Ravn, head of ratings and investor relations at Jyske’s mortgage arm. “Overall, I don’t think it’s a good sign for the economy with these very low interest levels that we are seeing at the moment.” Nordea Bank Abp, Scandinavia’s biggest lender, last month stunned investors in Denmark’s $495 billion mortgage market when it amended its prospectus to make way for negative coupons on bonds with maturities up to 30 years. Danske Bank A/S is still monitoring the situation, says Christian Heinig, chief economist at the mortgage mortgage arm of Denmark’s biggest lender.
If there is this much fear of coming deflation, then it stands to reason that eventually this is going to have a major downward affect on global housing prices.
You give me $1 and I only have to pay you back $0.97 in a year. So if I keep the $1 and don't spend, it is essentially risk free? I am too dumb, what am I missing?
You're not missing anything. The justification for this type of arrangement (from my understanding), is the belief that your $1 that today purchases $1 worth of goods, will purchase $1.05 worth of goods 1 year from now. So while yes, I am only repaying you 97 cents of the dollar that you lent to me a year ago, it doesn't matter because this 97 cents now buys $1.03 worth of goods when compared to prices 1 year ago (or something similar to that). In other words, deflation. In my opinion, the above logic is about as sound as the thinking that went into justifying CDO squared mortgage securities in 2006.
It's kind of totally different - there is no deflation fear- there is a hyperinflation fear, hyperinflation of assets fear that central bank will come an bid those into even deeper negative rate, so buy now before you can