Negative interest rates for non-state borrowers, the economy that is German

by on March 9, 2016 at 11:48 pm in Economics | Permalink

A German bank has become the first non-state borrower to issue euro denominated debt at a negative yield, another milestone as the continent’s financial system moves further into the world of sub-zero interest rates.

…Berlin Hyp issued €500m of covered bonds with no coupon and priced to yield minus 0.162 per cent on Tuesday, according to Bloomberg data. That means investors are guaranteed to lose money if they hold the bonds to maturity.

The FT story is here.  Here is some commentary from the story:

“It feels counter-intuitive,” said Joost Beaumont, a strategist at ABN Amro.

1 Patrick March 10, 2016 at 1:19 am

There is precedent ::Nestlé bond yields turn negative – :

That was yield on sale not rate on issue, but plainly this should not be a surprise especially considering that these are covered bonds.

2 dearieme March 10, 2016 at 8:16 am

It might be wiser to stockpile chocolate: I can recommend their Plain Chocolate with Pistachio Nuts.

3 Area Man March 10, 2016 at 1:19 am

Seriously, who is buying these things?

4 maros March 10, 2016 at 2:04 am

Some of the buyers are institutions that are legally obliged to invest a certain percentage of their portfolio into low yield, high security bonds. Since their supply is limited, this drives their yield into negative territory.

Another possibility for a negative yield is the a tiny, nevertheless a present change of euro-area breakdown, in which the bonds would be redeemable in Deutsche Mark, which, given Germany’s gargantuan trade surplus, would surely soar in value.

5 maros March 10, 2016 at 2:09 am

oh and the last factor that comes to mind – the inconvenience of storing large amount of money in cash stock. It is manageable to store 50k€ in 100€ notes; not all hat manageable to store 50M€ in 100€ notes.

6 Lord Action March 10, 2016 at 9:25 am

Minus 0.162 per cent is probably better than paying the carrying cost on cash. And I suppose there’s only so much physical cash, the government controls the supply of physical cash, and you need to pay taxes somehow.

I wonder if we’ll ever see a divergence between the value of physical cash and cash that exists only as an account balance?

7 baconbacon March 10, 2016 at 11:21 am

they will probably end up at the ECB one way or another.

8 Area Man March 10, 2016 at 1:21 am

This is tulip mania. Someday folks will look back at this time period in disbelief.

9 Tarrou March 10, 2016 at 6:12 am

Hillary pretty much did, and her supporters still love her! Just saying!

10 JWatts March 10, 2016 at 5:36 pm

The amounts at this point are paltry. Currently on 500 million the 0.162% only amounts to 222 Euros per day. So, it’s just not a significant amount of money.

But the over all trend and financial structure seems unstable. Is the banking system coming apart?

11 BruceC March 14, 2016 at 11:29 pm

I ran the numbers and came up with $2219 per day. Still not a large amount on such a large principal, but not insignificant, either.

12 ohwilleke March 10, 2016 at 1:57 am

What prevents someone from putting a boatload of 500 Euro notes in a safe and then selling depository certificates in the stash instead?

13 Larry Siegel March 10, 2016 at 4:51 am

Nothing. The cost of verifying that the person really has the notes in the safe, that he will return them to you when he is supposed to, and that he is not wanted by the police is surely greater than 0.162%, making it possible for Deutsche Hyp to issue bonds at -0.162% and not have the negative interest arbitraged away.

14 Patrick March 10, 2016 at 10:38 am

The cost of the safe, the security guards, the fire-proofing, the surveillance, etc?

15 JWatts March 10, 2016 at 5:37 pm

“The cost of the safe, the security guards, the fire-proofing, the surveillance, etc?”

Don’t the Swiss have a large amount of existing vault space? What are their fees?

16 Ricardo March 10, 2016 at 1:47 pm

I think Patrick gets it right. Once you factor in storage, security and insurance costs, a (very slightly) negative-yielding bond might be the better deal. Of course, if it isn’t, we will soon see the spectacle of hedge funds constructing Fort Knox-like facilities where they will store huge hordes of paper euro notes while shorting these bonds. That hasn’t happened yet and so it isn’t necessarily irrational for low-risk bonds to be carrying negative yields.

17 mulp March 10, 2016 at 2:45 am

Obviously a sign of too many people paid too little in wages and too many paid even more excessively too much in wages.

Those with high wage incomes can’t find equal goods and services to buy with their incomes, so they bid of prices of securities.

On the other hand, too many people can’t afford what they need, much less any capital assets like vehicles and houses, and certainly not boats and vacation cabins.

Thus too much revenue is sent into the blackhole of negative interest debt, especially to governments with exponentially increasing debt that buys the goods and services the bottom 50% of workers can’t afford but need badly enough that even conservatives feel compelled to buy for them.

18 Axa March 10, 2016 at 3:07 am

Retirement funds need to invest a fraction of assets in relatively secure bonds. It’s interesting to know who buys them.

In the retirement context, negative rates are some kind of inflation. Consumer goods price don’t increase but savings value decrease.

19 rayward March 10, 2016 at 6:44 am

Of course, conventional wisdom is that the greater the risk, the higher the interest rate. But is that true at the extreme? If the issuer of the bond is likely to default, what’s the point of a high interest rate, or any interest rate, since it won’t be paid anyway. Traders of such bonds aren’t seeking yield so much as gambling on the likelihood of default: when the risk of default goes up, the trading value of the bond goes down, and when the risk of default goes down, the trading value of the bond goes up. I’m reminded of the explosion of derivatives, many investors choosing to invest only in principal of debt instruments. Is interest, or the interest rate, even relevant any more? Is the interest rate an illusion?

20 Lord Action March 10, 2016 at 9:31 am

Economically, there is no difference between interest and principal. Those are just labels you’re putting on cash-flows. Sophisticated investors don’t care what you call the cash you give them. (Leaving aside some details as to tax treatment, contractual obligations, etc.)

When I do a valuation on, say, a bond that has some non-negligible probability of default, I consider all future cash-flows and the probability I will receive them.

21 JWatts March 10, 2016 at 5:40 pm

“If the issuer of the bond is likely to default, what’s the point of a high interest rate, or any interest rate, since it won’t be paid anyway. ”

If I suspect a bond holder will likely default in 4 to 5 years, but is unlikely to default before then, I might take a bond with a 30% rate.

22 William Woody March 10, 2016 at 7:44 am

Why would you not just buy a safe and fill it full of cash? After all, in a fiat currency regime, cash is essentially a 0%-yield treasury.

23 Axa March 10, 2016 at 7:52 am

inflation matters

24 John March 10, 2016 at 7:53 am


The cost of the safe, guards, insurance, the armored car to move the cash etc would result in losses greater that -0.162%.

25 They do buy safes March 10, 2016 at 8:44 am
26 JWatts March 10, 2016 at 5:50 pm
27 JWatts March 10, 2016 at 6:11 pm

If my math is correct, one thousand 500 euro notes is 1.44 cubic dm. So, you can store 17 million Euros in a Size 2 Credit Suisse safety deposit box for (200+180 key fee) CHF per year. 380 CHF is 346 euros.

That comes out to an interest rate of: -0.002%.

There is a substantial discount if you buy the much larger and cheaper Size 4 box, of course.

These bond rates do not seem stable.

28 Patrick March 13, 2016 at 4:48 pm

Actually, the fees would be more like 626 CHF for a size 2 box (400 CHF pa) plus key plus VAT.

But for the 50L that gives you, you could store CHF 35m using 35,000 of the nearly 40m CHF 1,000 notes in circulation, which still makes the “interest rate” less than -0.002.

But this STILL doesn’t get you so far with say 500m to invest. Then, you go back to sourcing, trucking, security, etc.

29 Gabe March 10, 2016 at 10:14 am

It seems that you are assuming there is zero risk of government doing a “bail-in” with funds invested in bonds?

30 Heorogar March 10, 2016 at 7:55 am

An interesting factor in the post is the “covered bond” which is a funding vehicle popular in the Eurozone and is nonexistent in the USA.

Most of the Eurozone does not have deposit guaranties or insurance.

This may be a stimulus ploy. Okay. However, I oppose the states’ wars on cash, e.g. negative interest rates. The politicians and bureaucrats that dreamt up this scheme already had proven themselves incapable of running monetary policy. Giving them additional discretion is insane.

31 dearieme March 10, 2016 at 8:18 am

“Most of the Eurozone does not have deposit guaranties or insurance.” Are you sure?
What is the status of the €85000 figure?

32 Heorogar March 10, 2016 at 9:43 am

You are correct, my bad. All Eurozone states guaranty deposits to 100,000 euros or 85,000 pounds. It’s a government guaranty. The EU nations do not have deposit insurance funds as does the USA.

33 gab March 10, 2016 at 12:33 pm

Covered bonds do exist in the US – or at least they did at one time although they might have all matured.

Bank of America issued a covered bond some time ago which I owned.

34 Bill March 10, 2016 at 8:14 am

If you were a German and you bought US treasuries and thought that the dollar was overvalued due to others buying US treasuries, and thought that the dollar would correct itself in the future, you would have to consider an alternative in your own currency at a negative return.

35 prior_test2 March 10, 2016 at 9:54 am

Investors are not guaranteed to lose money, they are paying .162% to insure that they receive their full principal back – insurance never really being free, obviously.

Or ensure, but the covered bond market is a major source of funding which is unknown in the U.S. This was the main reason that Merkel nationalized Hyporeal – to keep the covered bond market from suffering any damage. The wiki article is probably an adequate introduction.

36 Yancey Ward March 10, 2016 at 10:01 am

There are only two classes of people buying such bonds- institutions that are obligated to hold highly rated bonds regardless of yield, and people planning to book a capital gain by flipping the bonds to another sucker looking to do the same.

I have said it before, and I will say it again- in the end, the central banks will end up having to try to buy it all. The ECB took the next logical step into the black hole this morning.

37 Ricardo March 10, 2016 at 2:02 pm

I believe interest rates on bank deposits are also negative so obligations to hold bonds may not come into play. Whether you are a commercial bank, retail investor or private business with tens or hundreds of thousands of Euros you are looking to safely park somewhere, your choices come down to holding cash and paying for a safe, security, insurance, etc., putting it in the bank where you face a negative interest rate or buying bonds where you face negative yields. Once you account for the fact that literal cash is riskier and in some senses less liquid than money in the bank or in bonds, negative yields are probably rational and efficient. Banks are starting to charge customers for money held in their accounts because the banks also face the trade-off between assuming the risk for keeping all the cash in their vaults or paying someone to take it off their hands.

38 Tom Warner March 10, 2016 at 2:23 pm

Arguably this isn’t important, but I’m not sure this bank could be considered privately owned. It’s part of Berlin’s Landesbank, which used to be owned by Berlin but in its 2007 bailout was put under the federal savings bank association, which I believe is nominally predominantly owned by local governments through other Landesbanks, but practically controlled by or at least strongly under the influence of the federal government. In other words there is a very strong presumption of bailout support with this bank.

39 Mo=mk March 14, 2016 at 4:45 pm

In the end it all comes down to mr = mc

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