In the negative
A negative deposit rate, introduced by the ECB in July 2013 to provide stimulus to the Eurozone economy and encourage banks to lend more to businesses, is one example. Following the announcement of the new policy most banks decided not to immediately pass on additional costs to their corporate depositors. No bank, naturally, wanted to be the first mover. However, market participants remained convinced that if rates remained negative for long enough, some would eventually have to go down that route.
In recent months, that has indeed begun to happen, with a handful of custodian and commercial European banks applying negative rates. “I think there is some evidence that charging is happening in the market now,” says Suzanne Janse van Rensburg, EMEA Head of Liquidity at BofA Merrill. It’s not entirely down to monetary policy, however. “I think some banks have been looking at the LCR and the associated cost and taking a view on that,” she explains.
This is not, exactly, an unintended consequence. The ultimate objective of negative rates is, after all, to try and force cash back into the economy – substantial sums of which have been sitting on the balance sheets of large corporates – and the policy gives the banking industry little room for manoeuvre in that respect. Is that how corporates view it though?
“In my own experience, when I talk to clients they have been very understanding of that,” says Taylor. “I think that this further reinforces the need for dialogue between banks and corporates – we are in constant dialogue with our clients helping them to optimise the way their cash is managed. We do everything we can to support them, looking at where they want to hold the cash, whether it should be on- or off-balance sheet, and we put solutions and structures in place to help them get the best possible return on that cash.”
The impact of negative rates is also being felt beyond the banking industry. Sharp inflows could be observed in money market funds (MMFs) shortly after the banks began passing on the costs, which Yaron Ernst, Managing Director of Moody’s Managed Investments Group, believes is no coincidence. “I met with several treasurers recently who were very concerned with what that means, and about where they can place their excess liquidity now,” says Ernst.
That looks set to be one of the big questions treasurers will need to find an answer to in 2015. European MMFs are, at the time of writing, still able to serve as a positive yielding alternative to bank deposits. The yields on offer are marginal, however, and it may only be a matter of time before MMFs head the same way as some bank deposits.
“Yields are declining,” explains Ernst. “Since MMFs are refinancing their assets on a daily or weekly basis – depending on the maturity of their assets – and the assets they are buying into are yielding lower, it is probable that they will turn negative in the next few weeks.” The recent inflows, therefore, are likely only to be temporary and, once funds begin to reach or fall below zero, treasurers wishing to avoid erosion of principle will need new options.
But what are the other options? That will largely depend upon the risk appetite of the corporate. Moody’s expectation is that we are going to see a growing level of interest in alternative investment products such as separately managed accounts (SMAs), cash ETFs, and ultra-short bond funds in the coming months.
“For SMAs, corporates would have to work upon the relationships with the fund managers to devise personalised funds that match their objectives,” says Ernst. Whatever instrument one chooses – SMAs, ultra-short bond funds, or cash ETFs – there are similar trade-offs, he adds. “Either you accept the negative yields in MMFs or you take on slightly longer maturities, more risk, and possibly more fees, but generate higher yields.”