Globally, investors are holding US$11.7 trillion dollars worth of sovereign bonds that are yielding negative rates.
The current risk profile of the investable universe is so skewed that for some investors they have no choice but to buy bonds with negative rates, or gold with no yield, to keep their capital safe. That’s the cost of safety in this market.
Negative interest rates is a reality in countries such as Germany, Switzerland, Denmark, Sweden and Japan.
As a result, in Denmark, the banks pay you each month on your mortgage. (http://www.wsj.com/articles/the-upside- ... 1460643111)
These are desperate times for the affluent. The world is awash with capital and it is only going to get a whole lot worse.
Since the UK voted to leave the EU, the Bank of England has promised fresh stimulus and rate cuts in the coming months.
At the European Central Bank, where rates are at -0.40 percent, forward rates are predicting a greater than 50% chance of even higher negative rates before the year end as the EU economies inevitably deteriorate.
In Japan, Abenomics (the name of the Prime Minister’s stimulus plan) has been a spectacular failure since it was introduced two years ago. The country is headed towards deflation and the yen has strengthened aggressivey – the exact opposite of what was perscribed. The expectation is for the Bank of Japan to further reduce rates to -0.30 percent in July in what will be a final attempt before its moribund economy reaches the day of reckoning. It cannot be ruled out a nuclear option (in a QE sense) will be used that will unleash a tsunami of carry trade not seen by mankind before.
Add to this, China’s policies have had the effect of unleashing global stimulus in the form of capital outflows such as (over valued) cross-border M&As, emmigration, international tourism consumption, and private offshore investments. According to a recent Goldman Sachs report, China’s outflows reached US$500 billion in just the last eight months – and this is through legitimate channels only.
In the US, money market traders are betting against a rate rise for the remainder of this year. It is not hard to see why. In a world flooded with capital chasing so few assets, any rate rise will only draw an undesired amount of flows into the US and therefore increase the dollar’s value so much that it affects its competitiveness in a global economy already lacking demand.
These additional monetary easing policies will inevitably filter its way into the Canadian economy. Chinese money will amplify it. Real estate prices, particularly in Vancouver and Toronto, will continue to benefit as a relative safe haven.
Justin Trudeu had an easy time explaining quantum computing to the populace. He won’t find it as easy to explain why Canadian home prices will continue to rise. He will find it even harder to explain when homeowners are paid to take out a mortgage — soon.