Even though performance is down, investors are buying bonds like crazy. And their prices rise dramatically. What does this behavior suggest?
Government bonds of countries with high investment grade ratings, such as the United States and Germany, are known as so-called risk-free assets. The job of investors is to shift from risky assets to such assets. Risky assets include, for example, equities.
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However, this approach is quite logical given the current growing concern about a global recession. Central banks have been reacting to this threat for some time and have been the first to cut interest rates.
Even if one is not trained in economics, one can answer the question of whether negative interest rates are in line with basic economic principles. That is, simply put, if you borrow, you get paid for it. To us, it seems like a fairy tale where everything is reversed, but it is basically what we all dream about.
So let\’s stop dreaming. But for the financial markets as a whole, this is not a dream, but a complete nightmare. One Danish bank has announced that it will begin 10-year mortgage lending at -0.5%
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Analysts dig deeper and find that Nordea is also currently planning mortgage lending at this rate!
Experts agree that if government bond yields continue to fall, or at least remain in negative territory, and low interest rates are still supported by the central bank, then the negative interest rate model is effectively not utopian.
One of the factors contributing to this situation is that we are already dealing with a financial crisis and trying to deal with the insane fallout that may lie ahead. In order to avoid recession and at the same time jump-start economic growth and adhere to inflation targets, bankers need to cut interest rates to zero or even lower.