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Where can negative rates currently be found?

Negative rates

Lenders don't pull in profits any more: they do the paying. Same goes for depositors. Negative yield now affects dissimilar yet interrelated assets and financial movements. For banks, investment options vanish; small investors face entirely new prospects.

27 january 2016

Tuesday, January 19th, the Spanish Treasury once again placed 6 and 12 month bonds on the market with historic low rates. After a brief rebound in December’s auction, the coupon for 6-month bonds touched -0.098%, while the 12-month security fell to -0.055%. Demand won’t fall (twice the debt that was auctioned off), interest won’t rise.

The not-so-strange-now case of negative yields is not yet reverting itself and has also provoked a domino effect on other rates. We’ve compiled what financial movements are lugging around negative rates at the moment.


Deposits: The ECB’s plan

It has already been a year and a half since the European Central Bank introduced negative rates on daily deposits made into the institution. It started at -0.1%, but two months ago the rate was once again lowered to -0.3%, yet the volume of deposits has not yet significantly slowed down. Similarly, the ECB has kept on cheapening the price of money – down to 0.05% –  with the idea of pushing that rate into unknown territory perhaps also on the horizon. The Switzerland National Bank has also pushed interest rates to -0.75%, and the national banks of Denmark and Sweden also experimented similarly with their own currencies before the ECB did.

Evolución de los intereses del Banco de SuizaSNB interest rates, ten-year evolution (source)

For the time being private banks have barely flirted with this circumstance and it seems impossible for these rates to reach individual clients… Thought according to certain sources it has been the object of discussion. And in “pioneer” Switzerland there has been one example.


Short, mid and long-term bonds: Half of Europe in red

In Spain negative rates have not yet affected mid-to-long-term bonds, but in Europe the picture is shocking. Public debt has all but fully abandoned small investors. These are the countries that offer sub-zero fixed-rate debt (figures from January 26th at 11:45 am peninsular time), according to financial website

One month debt: Bulgaria offers this security at a rate of -0.270%.

1 year: Italy is in a very similar place as Spain, with one year debt falling just under the 0% mark, and short-term securities slightly lower, down to -0.25%.

2 years: Sweden’s two year bonds sell at around half a negative percent point, though five year bonds have strolled several times under zero.

3 years: Amongst those countries rescued after the financial crash, Ireland offers the best guarantees to investors, with a yearly coupon of -0.2168 for its 3 year securities. The Czech’s situation is puzzling: short term debt (3 and 6 months, 1 year) inspire less confidence than mid-term bonds (2 and 3 years), which are in negative figures.

5 years: Austria and Belgium show twin examples: one year debt auctioned off around -0.35 and -0.36%, rising steadily up to -0.1% for five year debt (slightly higher for the Belgians). France too, although five year bonds don’t stray away much from 0%.

6 years: The Bund is perceived as the safest security in the European Union today. With two year bonds at -0.456% and 6 year debt as low as -0.114%, Germany will presumably sell off 7 year “bundesbonds” at a negative rate shortly, following current trends. Trailing closely are similar securities from the Netherlands and Finland.

10 years: In Switzerland the situation borders on the absurd. 10 year bond buyers must expect the bearish trend to continue, otherwise they face a yearly negative yield of -0.235%. In the case of monthly bonds, we’re speaking of -0.870% rates. 30-year Swiss debt (0.428%) gives a similar yearly profit to 4-year Spanish obligations.


Euribor: Beware mortgage-owners

Evolución del Euribor desde 2014Euribor evolution since 2014 (sourceExpansión)

The main interbank lending rate is also readying itself for a dive into negative rates. 12-monrh Euribor, an index also used as the main reference for Spanish mortgages, is practically setting new historic lows every day: January 26th it fell to 0.028%. Actually, it is the only variation of the Euribor not in negative territory. It seems inevitable for the 0% barrier to be crossed in 2016.

Banks are now scrambling to protect themselves by proposing large margins from the 12 month Euribor rate, of at least +1%, or promoting mortgages with fixed interest rates (more than 90% of Spain’s mortgages depend on variable rates). But what happens with those long-term contracts, signed when the differential were sometimes as low as +0.25%? For starters, that Euribor’s bearish trend is fantastic news for their owners, now that “floor clauses” are deemed to be illegal. With the margin used as an example, they would currently be paying a monthly interest of 0.278%. The questions will start if the Euribor rate also crosses into negative territory: if adding the Euribor and the differential margin brought up a negative result – as unlikely as that scenario is – would banks pay clients for their mortgages? Neither current legislation nor the few available precedents (eg: banks with multicurrency mortgages) can yet answer that question.