Denmark’s Economy Minister Margrethe Vestager said the reaction to the Federal Reserve’s talk of scaling back stimulus as early as next month has made clear just how addicted people have become to record-low rates.
The volatility that followed the Fed’s June signal it may be preparing to taper support measures was a reminder that low borrowing costs are still underpinning demand across much of the globe, Vestager said.
“It’s pretty obvious how we benefit from the low rates when we consider what happened all over the world when the U.S. Fed scared people saying that monetary policy perhaps should be slightly less relaxed,” Vestager said yesterday in an interview in Copenhagen. “We’re currently benefiting from very loose monetary policy.”
Vestager said her government will target measures that help keep rates low in Denmark, which is home to the world’s most indebted households. Since June 19, when Fed Chairman Ben S. Bernanke first mentioned he may reduce his $85 billion in monthly securities purchases, bond yields have jumped across most of the globe.
Yields on U.S Treasury bonds due 2023 soared as high as 2.9 percent this month from as low as 2.08 percent in June before the Fed’s taper signal. German 10-year yields have risen more than 30 basis points since June, while borrowing costs on similar-maturity Danish debt touched the highest in at least a year. Denmark’s 10-year yield was 2.03 percent today, compared with a low in May of about 1.3 percent, according data compiled by Bloomberg.
Danes’ record debt levels make them more vulnerable to shifts in rates, the International Monetary Fund has warned. The Organization for Economic Cooperation and Development estimates Danish households have 310 percent debt relative to their disposable incomes, a world record.
“Since the crisis, consumers have clearly shown a desire to consolidate,” Vestager said. Denmark’s bond-backed mortgage system, the world’s largest per capita, has so far protected households from interest rate shocks as investor demand for the mostly AAA rated securities keeps rates low.
“We’re using a financing model that’s proven its value over hundreds of years,” Vestager said. That’s helped “mitigate refinancing risks,” she said.
Monetary accommodation is a regime that “everyone benefits from,” Vestager said.
Since Bernanke’s June comments, he and his fellow policy makers have sought to reassure investors that paring stimulus doesn’t signal a tightening of monetary policy.
San Francisco President John Williams said yesterday the Fed needs to coordinate its message “effectively” with other central bankers to help avoid “at least somewhat the risks of big market turmoil.”
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