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Commentary

Negative Interest Rates: Now US Banks Charge You To Give Them Money, But There Is Hope

Indian banks charge you if you visit them. Or for cash deposits in “non home” branches. But certain US banks are finding it painful to take any sort of deposit, it seems:

JPMorgan Chase recently sent a letter to some of its large depositors telling them it didn’t want their stinking money anymore. Well, not in those words. The bank coined a euphemism: Beginning on May 1, it said, it will charge certain customers a “balance sheet utilization fee” of 1 percent a year on deposits in excess of the money they need for their operations. That amounts to a negative interest rate on deposits. The targeted customers—mostly other financial institutions—are already snatching their money out of the bank. Which is exactly what Chief Executive Officer Jamie Dimon wants. The goal is to shed $100 billion in deposits, and he’s about 20 percent of the way there so far.

We can’t lend out this money. So pay a fee to deposit it with us. And oh, we don’t pay you any interest either.

Negative rates are present in bonds too. First, the ECB had negative rates on money deposited with it. Then, the Swiss bonds of 10 year maturity saw negative yields on issue. That is, when they issued the 10 year bond, the buyer would lose money if he held it for 10 years. Not only could no money could be made on that bond at all, effectively, investors were paying to hold a bond for 10 years. Then Germany managed to sell 5 year bonds at negative yields.

In Break on through (to the other side)

The reason why we have negative rates right now is because the supply of safe assets is already so small after years of unconventional monetary policy and austerity combined with increased demand for safe assets due to fears about economic slowdowns across the world. The supply was low enough already that this increase in demand took the price of the bond above the face value of the bond.

Our view

This is clinically insane.

Losing money over 5 or 10 years, and that too by “safe” institutions. Insane.

And we blame startups for raising too much money and spending it. Or VCs for pouring money into restaurant delivery startups. Whatever they’re doing, at least they’re not calling themselves safe.

Negative 10 year yields and negative interest rates are the bottom of the financial septic tank, and we are now there.

At this point, money is going out of fashion. Literally, as you accept lower money tomorrow for an “investment” today. It’s depreciating.

There is Hope, In a Horrible Sort of Way

Luckily, sanity appears in the US bond market as yields begin to “grow up and act like a mature person”, crossing 2%. And because of that, financial markets worldwide are beginning to hurt.

Investors have pulled money out of exchange traded funds that track global corporate bonds at a record pace, with $1.8bn leaving the sector in the past five days, according to data provider Markit.

The rush for the exit comes as eurozone and US government bond yields rose further on Wednesday. German 10-year Bund yields have climbed 47 basis points since mid-April, and US 10-year Treasuries 29 bps over the past week.

Indian yields too, have risen, to 7.9%, a 20 bps rise in two weeks.

The reversal of the “negative interest rate” concept is – rising yields, and falling bond prices. Which means falling equity prices too. Who’d have thunk Money will come back in fashion so fast?