Edgy investors increasingly willing to pay for protection

The amount of money stashed away in negative interest eurozone debt has more than doubled since October to 1.2tn Euros.

by Andrew Saunders
Last Updated: 19 Jan 2015

Negative interest Eurzone debt - the special debt class created by the European Central Bank - reverses the usual state of affairs by charging the holders interest rather than vice versa. It’s a topsy turvy world we live in, to be sure.

Despite this apparently glaring flaw, the debt has proved surprisingly popular with investors, as a safe haven in times of uncertainty. The amount of cash salted away has more than doubled since October, according to research by Bank of America Merrill Lynch, up from 500bn Euros to 1.2tn Euros. That's about a quarter of all outstanding Eurozone sovereign debt.The total was zero back in June, before the ECB imposed the negative interest rate, charging banks to park cash there.

So why are all these apparently sophisticated international investors keen to pay the ECB for the privilege? Well government debt is generally regarded as the safest of all safe havens, so the interest that holders pay is in effect an insurance premium to protect their capital.

It’s a sign of pretty uncertain times that investors are even countenancing this, although given the recent unwelcome arrival of deflation in the eurozone it’s perhaps not that surprising. At least this way you know how much it’s going to cost you. And the yields on many regular government bonds are hardly much better at present, having hit record lows recently.

But it is all rather embarrassing for the European Central Bank, which created this brand new asset class with the express intention of providing the most uniquely unattractive investment proposition it could think of. Surely, if investors have to pay a regular fee to stash their spare cash, went the reasoning, then they will be more likely to put their money to better use out in the market in higher return, albeit riskier, investments?

Unfortunately for the big brains at the ECB, it turns out that this isn't entirely the case, and that safety remains pretty popular at any price. With elections coming up in Greece there are also major concerns over where a possible Grexit might lead, so paying for protection might not end up looking so daft after all.

Whatever happens, it’s good to see the law of unintended consequences is still alive and well in the electronic vaults of the ECB.  

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