Monday, March 23, 2015

Euro Money Fund Interest Rates Turn Negative

From FT:
Yields on virtually all euro-denominated money market funds aimed at institutional investors are likely to turn negative in the next two weeks, according to the industry’s trade body.

The yields on funds that specialise in holding eurozone government debt have already turned negative as returns on sovereign debt issued by countries such as Germany, France, Finland, the Netherlands and Ireland have fallen below zero.

However, with corporate debt yields and bank deposit rates also increasingly turning negative, yields on “prime” funds, which can invest in a broader range of assets, are also about to go sub-zero, according to the Institutional Money Market Fund Association.

“It’s imminent, it will happen in the next week or two,” said Susan Hindle Barone, secretary-general of IMMFA. “When some start to go they will all go quite quickly.

“This move in large part is due to the actions and policy stance of the European Central Bank,” added Ms Hindle Barone, who cited the ECB’s deposit rate of minus 20 basis points, introduced in September 2014, as a key driver.

Remember, as even Paul Krugman notes, there is a hard limit to  how negative rates can go and that is the cost of holding physical currency.

Krugman has written:
When central banks push interest rates on government debt below zero, the effective lower bound is the return on cash held by people who would otherwise be holding that government debt — not people looking to expand their checking accounts. So the liquidity advantages of bank deposits over cash in a vault are pretty much irrelevant. It’s all about the cost of storage.
And really, how high can that cost be? Cecchetti and Schoenholtzargue that given a little time banks or other financial institutions ought to be able to store currency for clients at very low cost — as they say, turning back into the goldsmiths from which banks as we know them evolved — and might even be able to provide some checking-like services on the side.
So it’s not quite a ZLB; but analytically and in terms of policy, a minus x lower bound, where x almost surely less than 1, isn’t all that different.



  1. The negative rate won't hurt investors. They'll make up for it in volume.

  2. Money market fund expenses, though traditionally lower than other asset classes, can cause a fund to have a negative yield even if the debt instruments it holds still have positive rates. These funds can become risky, costly, client conveniences for the management companies so I would expect to see firms exiting this line of business. Lack of bids for newly issued very low or negative rate paper could cause havoc. Also, where do the institutional cash balances end up?