Madness

[ny_quant]

Two European companies -- French drugmaker Sanofi and German household products maker Henkel -- last week became the first firms to persuade investors to pay them to borrow euros. By selling bonds yielding minus 0.05 of a percentage point, they may well have signaled the bond market's peak

https://www.bloomberg.com/view/articles/2016-09-13/the-bond-market-is-suffering-a-ukrainian-chicken-moment

Насчёт пика не знаю. Как говорится, you’ve seen nothing yet. Во всяком случае, если б меня ещё недавно спросили может ли такое быть, я бы сказал, что такох идиотов не бывает (вернее, бывают, но они уже потеряли свои деньги на чем-то другом) и опять был бы неправ.

Comments

[henryviii.livejournal.com]

Does it actually help the economy?

It’s hard to say. There haven’t been sharp turnarounds in the countries that have tried negative rates.

It remains to be seen whether stronger benefits come at more-negative rates. And it’s impossible to know whether things might have been much worse had the countries not tried negative rates.

Isn’t this bad for banks?

It is. Banks do lots of things, but the very core of banking is lending money at higher rates than you pay to depositors: Lending at 6% and paying depositors 2% is a nice business. But banks are now lending at extremely low rates, yet they have a hard time pushing the rates they pay depositors much below zero.

Why?

Depositors, especially smaller ones, can hold cash instead of facing negative rates. Cash is like a deposit with an interest rate of 0%. It doesn’t shrink: €10,000 in cash will be €10,000 tomorrow. Might want to buy a safe.

Commercial banks get the cash they give to their customers from the central bank: The central bank gives them bank notes and reduces their reserve balances. (That’s how reserves escape the closed loop.)

That’s good for banks, then—don’t they want to get rid of excess reserves?

To a degree. But banks don’t want customers to yank their deposits en masse. It would be better for banks if they could find a way to keep customers but charge them negative rates.

For central banks, it defeats the purpose of negative rates: If customers suddenly pulled huge amounts of deposits, commercial banks might start needing reserves—and that demand would push the interbank lending rate up, exactly the opposite of what central banks are trying to do.

How negative could negative deposit rates get?

No one knows. At a modestly negative deposit rate, cash probably isn’t worth the hassle: You need vaults and guards, and it’s difficult to use in large transactions. But at some point, that calculation changes.

What about the Fed? Can it go negative?

Possibly. Fed Chairwoman Janet Yellen has suggested as much. There are some wrinkles. Here’s one: The Fed’s version of a deposit rate, called interest on excess reserves, is now at 0.5%. But there are some government-linked institutions with accounts at the Fed, such as the Federal Home Loan Banks, that aren’t eligible to receive that interest payment—they get 0%. So those institutions have an incentive to lend reserves at less than 0.5%. And they do. As a consequence, the federal-funds rate—the overnight rate in the U.S.—is a bit below the floor established by the deposit rate.

If the deposit rate went negative, those institutions wouldn’t have an incentive to lend. The drop in supply might press the overnight rate up—against the grain of what the Fed would be trying to do.