Free mortgages and bond yields turned upside down: trade war impacts veer toward the wacky

CBC News
A share trader reacts as he sits behind his trading terminal at the Frankfurt Stock Exchange CBC News | James Alexander Michie

A share trader reacts as he sits behind his trading terminal at the Frankfurt Stock Exchange. More than one quarter of all the government debt in the world is currently paying out a negative yield, including all of Germany's. (Kai Pfaffenbach/Reuters)

It’s been relatively easy, so far, to feel immune to the effects of the trade war that U.S. President Donald Trump launched about a year ago.

It’s been relatively easy, so far, to feel immune to the effects of the trade war that U.S. President Donald Trump launched about a year ago.

Sure, maybe if you were the captain of a ship full of sorghum, changing direction on the high seas with each new presidential tweet, you might sense the tides were shifting. And anyone trying to buy a Harley Davidson in Hungary was likely also keenly aware that there was some funny business afoot.

But unless you happened to be a Canadian exporter of steel and aluminum or a Mexican avocado farmer, it was perhaps easy to think the world of international trade was largely business as usual.

Not anymore. Markets were whipsawed this week by the slow realization that the outlook for the world’s economy isn’t getting better — it’s getting worse. And while 800-point drops for the Dow Jones index tend to generate a lot of headlines, it’s what’s happening in some far more under-the-radar indicators that are the best signs of just how wacky the economy is getting.

Negative rates

Bond yields don’t tend to get a lot of attention outside of the financial press, but their behaviour in recent weeks is perhaps the surest sign of just how topsy-turvy the global economy has gotten. Bonds are debt, issued by governments and companies, that come with an interest rate attached so that the people loaning out the money get a return over time.

Generally speaking, bonds are seen as safe investments, which is why investors only expect a few percentage points of return from holding them at the best of times. But the fog over the economic outlook is so thick at the moment that many borrowers are getting away with selling bonds offering a negative yield.

Interest rates have gotten so low that Danish bank Jyske has started offering a negative-rate mortgage that actually pays the borrower. (John McConnico/Bloomberg News)

Anyone buying that bond is willingly buying an investment that’s guaranteed to lose money, but investors are more than happy to buy it up — because the fear is that alternative investments will fare even worse.

That may sound great for anyone looking to buy a home in Copenhagen, but it’s very bad news for the world’s economy, says Paul Gardner, partner and portfolio manager of Avenue Investment Management.

“There’s something around $16 trillion of bonds around the world dealing with negative interest rates,” he said in an interview with CBC News this week. “That’s very unhealthy … just because it has a feel of instability.”

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Source: Pete Evans | CBC News

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