Interest on Dutch government debt above zero
For the first time in over a year, there was a small plus for this week. The market interest rate on Dutch government bonds with a term of ten years crept above zero on Wednesday. The Dutch ten-year interest rate was almost 0.06 percent for a while, on Friday it fluctuated around 0.03 percent.
Those are, historically, extremely low percentages. However, interest rates are now positive. That is the first time since March 2020, when investors briefly panicked about the corona recession. Between the end of 2016 and mid-2019, the interest rate was above zero for a longer period of time. If the trend of rising bond yields continues – interest rates are now rising all over the Western world – this could have wide-ranging consequences in the economy: for consumers who save and buy houses, for pension funds and for financing the national debt. But it is unclear whether the trend will continue.
Investors’ fear of inflation is embedded in the interest rate hike. Inflation causes the value of investments to fall – for which investors demand a higher risk compensation (the interest rate). Inflation fears come mainly from the US, where President Biden’s unprecedented stimulus measures threaten to overheat the economy. Annual inflation in the US was 4.2 percent in April, it emerged on Wednesday. Inflation can trickle down to Europe through products that are traded. In addition, economic growth in Europe is expected to pick up now that the pace of vaccination is accelerating in many countries. This may also fuel inflation (1.6 percent in the eurozone in April).
Whether the trend of rising bond yields will continue strongly depends on the central banks. They have reduced interest rates during the corona crisis by buying up bonds en masse, to keep borrowing costs low for citizens, companies and governments.
In recent weeks, the Federal Reserve and the ECB have repeatedly stated that borrowing costs should remain low for the time being, because the economic recovery is still early. The ECB in particular seems determined to prevent a drastic rise in market interest rates. The ‘financing conditions’, says ECB President Christine Lagarde each time, must remain ‘favourable’. The deposit rate that the ECB itself charges banks is at minus 0.5 percent, and there is no indication that this will change any time soon.
The rise in capital market interest rates is already noticeable. The funding ratio of the big four Dutch pension funds is increasing, according to quarterly figures. For years, falling capital market interest rates put the position of pension funds under pressure.
Little seems to be happening in the mortgage market. Mortgage lenders do not yet pass on the accrued interest to customers, financial service provider Van Bruggen Adviesgroep notes on its website. They are afraid of losing customers to competitors. But: “If market interest rates continue to rise, it is ultimately unavoidable that lenders will also raise mortgage rates.”
Savings rates continue to show a downward trend. Rabobank account holders will pay negative interest on savings above EUR 100,000 from 1 July, the bank announced at the end of April. Rabobank is the last major bank in the Netherlands to pass on negative interest rates to private individuals.