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One thing they don't mention as a cause is regulatory requirements to hold certain classes of sovereign debt or other "risk-free" securities, for instance as co

One thing they don't mention as a cause is regulatory requirements to hold certain classes of sovereign debt or other "risk-free" securities, for instance as collateral.

bradleyjg 12y ago
Do the rules forbid holding cash? At least for capital adequacy, I was under the impression that cash, like own-country sovereign debt, is not risk discounted. Normally you'd prefer debt to cash, but if it has a negative nominal yield, I'd think you'd prefer the opposite. Ditto for bonds as currency play, why not cash instead? Frankly the only rational reason I can think of to buy a bond with a negative yield is if the loss is less than the carrying costs of cash. And while that's not free, it's hard to see that anywhere near 100 bps per year on large sums of money.
- aembleton 12y ago
  There is some costs associated with securing that amount of cash and then I guess you'd want to insure that money in case of theft. The insurer would then need to store a large amount in safe assets, which would then go into bonds. I guess, maybe storage companies might move into this business but it's probably just safer and more convenient to buy a piece of paper.
  - bradleyjg 12y ago
    The Swiss Franc, just to take an example, comes in denominations up to 1000 Franc ($1083 at current exchange rates). According to this site: http://www.pagetutor.com/trillion/index.html http://www.pagetutor.com/trillion/index.html $100M fits on a pallet stacked 3 feet high or so. With banknotes worth 10x as much, that'd be a billion Swiss francs. It's hard to believe it is going to cost you 8.12 million francs to securely store that for two years, which is what you'll currently pay for the privilege of owning the two year Swiss bond.
    - brohee 12y ago
      Seriously, even dismissing the cost of the facility, how many people do you think are needed to guard what is basically a truckload of money... I don't think 200k a month is nearly adequate. Those bonds are still expensive...
    - darkmighty 12y ago
      Remember a single fire could destroy that if you just stacked it on a pallet. I agree 8.12 million is probably too much, but even handling e.g. USD $1 billion costs a lot (you have to bring them from the central bank I suppose?). Even having a company that has enough capital and is trusted enough costs a lot of money. I think the principle shouldn't be "Interest rates will never go below zero", but "Interest rates have a lower bound", which still stands I suppose.
      - xxxyy 12y ago
        Well then what is the lower bound? The standard way to prove inequalities that should exist in a free market is through showing arbitrage patterns. This way one can prove f.eg. that a call option should never be more expensive than the underlying security, or that a call plus a put is essentially a futures contract. How do we show the lower bound on bond yield rate? Arbitrage executed through a company that employs exhaustive security measures allowing its clients to store pallets of cash? It still depends on time-varying factors, such as employee costs, utilities, the probability of a random natural disaster or the probability of a fire wrecking the entire building.
        darkmighty 12y ago
        Yes, that lower bound is a function of all those things: security costs, labor costs, etc. They can be laboriously approximately quantified. But it surely exists: for example, it's inconceivable the rate to ever reach -30% because storing money will never get that expansive in normal conditions (please discount apocalyptic scenarios).
- notahacker 12y ago
  As any effort banks make to shift their zero risk assets to cash won't go unnoticed by the ECB, there's also the implied risk that any bank going to the effort of acquiring unusually large piles of cash to avoid negative interest on reserves, will be subject to other direct or indirect financial penalties. I'd still expect banks' cash holdings to rise substantially at the margin, where that risk is pretty low, but its existence means it probably wouldn't economically rational for any bank to try to evade the interest on reserves even if their cost of holding cash was zero.
xxxyy 12y ago
They did mention it: > Pension funds, mutual funds, and other impersonal investment vehicles have rules and formulae they're supposed to be following. To the extent that those rules call for the holding of safe bonds, some bond-buying can simply happen on autopilot.

One thing they don't mention as a cause is regulatory requirements to hold certain classes of sovereign debt or other "risk-free" securities, for instance as collateral.

bradleyjg 12y ago

Do the rules forbid holding cash? At least for capital adequacy, I was under the impression that cash, like own-country sovereign debt, is not risk discounted. Normally you'd prefer debt to cash, but if it has a negative nominal yield, I'd think you'd prefer the opposite. Ditto for bonds as currency play, why not cash instead? Frankly the only rational reason I can think of to buy a bond with a negative yield is if the loss is less than the carrying costs of cash. And while that's not free, it's hard to see that anywhere near 100 bps per year on large sums of money.

aembleton 12y ago
There is some costs associated with securing that amount of cash and then I guess you'd want to insure that money in case of theft. The insurer would then need to store a large amount in safe assets, which would then go into bonds. I guess, maybe storage companies might move into this business but it's probably just safer and more convenient to buy a piece of paper.
- bradleyjg 12y ago
  The Swiss Franc, just to take an example, comes in denominations up to 1000 Franc ($1083 at current exchange rates). According to this site: http://www.pagetutor.com/trillion/index.html http://www.pagetutor.com/trillion/index.html $100M fits on a pallet stacked 3 feet high or so. With banknotes worth 10x as much, that'd be a billion Swiss francs. It's hard to believe it is going to cost you 8.12 million francs to securely store that for two years, which is what you'll currently pay for the privilege of owning the two year Swiss bond.
  - brohee 12y ago
    Seriously, even dismissing the cost of the facility, how many people do you think are needed to guard what is basically a truckload of money... I don't think 200k a month is nearly adequate. Those bonds are still expensive...
  - darkmighty 12y ago
    Remember a single fire could destroy that if you just stacked it on a pallet. I agree 8.12 million is probably too much, but even handling e.g. USD $1 billion costs a lot (you have to bring them from the central bank I suppose?). Even having a company that has enough capital and is trusted enough costs a lot of money. I think the principle shouldn't be "Interest rates will never go below zero", but "Interest rates have a lower bound", which still stands I suppose.
    - xxxyy 12y ago
      Well then what is the lower bound? The standard way to prove inequalities that should exist in a free market is through showing arbitrage patterns. This way one can prove f.eg. that a call option should never be more expensive than the underlying security, or that a call plus a put is essentially a futures contract. How do we show the lower bound on bond yield rate? Arbitrage executed through a company that employs exhaustive security measures allowing its clients to store pallets of cash? It still depends on time-varying factors, such as employee costs, utilities, the probability of a random natural disaster or the probability of a fire wrecking the entire building.
      - darkmighty 12y ago
        Yes, that lower bound is a function of all those things: security costs, labor costs, etc. They can be laboriously approximately quantified. But it surely exists: for example, it's inconceivable the rate to ever reach -30% because storing money will never get that expansive in normal conditions (please discount apocalyptic scenarios).
notahacker 12y ago
As any effort banks make to shift their zero risk assets to cash won't go unnoticed by the ECB, there's also the implied risk that any bank going to the effort of acquiring unusually large piles of cash to avoid negative interest on reserves, will be subject to other direct or indirect financial penalties. I'd still expect banks' cash holdings to rise substantially at the margin, where that risk is pretty low, but its existence means it probably wouldn't economically rational for any bank to try to evade the interest on reserves even if their cost of holding cash was zero.

xxxyy 12y ago

They did mention it: > Pension funds, mutual funds, and other impersonal investment vehicles have rules and formulae they're supposed to be following. To the extent that those rules call for the holding of safe bonds, some bond-buying can simply happen on autopilot.