Negative Mortgage Rates?


The first quarter of 2015 has come and gone. US equity markets entered choppy waters in the first quarter and major stock market indices finished Q1 2015 mixed. The S&P 500 registered a paltry yet positive quarterly gain of 0.4% to end at 2067.9. This marks nine consecutive quarterly gains for the index and volatility is back to the forefront.

The markets entered choppy waters in Q1 2015 and faced multiple headwinds in the form of a strong dollar, negative earnings revisions, and anxiety over the looming Federal Funds rate hike. It comes as no surprise that the quarter was marked by an uptick in volatility.

U.S. Dollar

Speaking of the dollar, the increase will put pressure on companies with significant international sales. A stronger dollar makes our exports more expensive and imports less expensive. Take a look at the dramatic rise in the U.S. dollar vs. a basket of global currencies over the last eighteen months.

U.S. Dollar Index – October 2013 to April 2015
Interest rates

In the U.S., the Fed is looking for signs of a move back toward 2% inflation and evidence of wage inflation before it raises the bellwether Fed Funds rate for the first time since 2006. The Fed acknowledges an improved economic environment and healthier labor market but it also recognizes that there is very little pressure on core inflation and that a strengthening dollar has already put a burden on U.S. exporters.

In Europe, interest rates are going lower. German 10-year bonds now yield .10% (that’s one tenth of one percent). The following Wall Street Journal story is extraordinarily remarkable:

Wall Street Journal 4/13/2015

“Negative interest rates in Europe have created a previously inconceivable problem for some banks: They may soon have to pay interest to customers who borrow from them.

“In countries such as Spain, Portugal and Italy the base interest rate used for many loans, especially mortgages, is Euribor, which stands for the euro interbank offered rate. Euribor is based on how much it costs European banks to borrow from each other. This benchmark and others like it have been falling sharply, in some cases into negative territory, since the European Central Bank introduced measures last year meant to boost the Eurozone economy.”

Because banks set interest rates on many loans as a small additional percentage above or below a benchmark such as Euribor, the tumbling rates are leaving some banks facing the paradox of actually owing interest to borrowers. At least one bank, Spain’s Bankinter has been paying some customers interest on their mortgages by deducting that amount from the principal the client owes.”

This has to be a signal that we are near a bottom in this interest rate cycle.


Oil continues to hover around the $50 level with forecasts of the price recovering to the mid $60 level. We shall see. Most forecasters missed the 50% decline from last July.

The New York Times reports, “Citigroup, for one, expects prices to continue falling in the coming months, as output remains high, supply is building up and investors who had helped prop up prices begin to sell.”

“While prices have held relatively firm, there are significant signs of weakness ahead,” Citigroup said in a note to clients on Tuesday.”

West Texas Oil – April 2014 to April 2015

Wells Fargo writes, “some stock investors seem quite certain that the Fed is on the verge of hiking interest rates at their mid-June monetary policy meeting. Keep in mind the meeting is only two months away, a blink of an eye in Fed-time. There hasn’t been anything close to what we would consider a clear message from our central bankers that they are ready to pull the trigger and start the long process of normalizing rates that soon. In fact, there seems to be considerable disagreement within the Fed over the timing of the initial rate increase in this cycle.”

We agree. The Fed’s message continues to be clear as mud.

J. Brock Hamilton
April 13, 2015