What does a -0.75% Interest rate mean?

[imoldernu]

This AM, read several articles about the Swiss Banks... Read them twice, and still don't understand how this works.

Obviously some big changes as the articles mentions "macro derivatives", but how important? Is this just an adjustment, as in devaluation? ...

Looking for something that makes this a little simpler for financially ignorant folk like me, to understand.

 

[Dash man]

It means it costs you to keep money in Swiss banks. The Euro is likely to be devalued soon and the Swiss Franc unlinked itself to protect itself. Just another step in the coming currency wars...going to get interesting.


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[2B]

A negative interest rate on the deposit means they charge you for holding your money just like they made you a loan.

I'm not sure what articles you were reading. By the Swiss no longer supporting the euro at 1.20 to the franc, it resulted in a relative devaluation of almost (if not all) all currencies against the swiss franc. This made the swiss franc more valuable and it's definitely not a devaluation to the Swiss.

I am assuming that their central bank felt they couldn't keep pouring francs into the infinite rat hole to prop up the euro. If the ECB starts QE, it's likely that the pressure for people to move out of the euro would overwhelm them if they continued the 1.20.

This will ultimately make Switzerland even more expensive to visit and buy things from.

 

[braumeister]

And it's not really new, either.
I had a friend back in the 70s who used to brag about his secret numbered Swiss bank account which charged him 1% interest. He had a small account (just a few thousand dollars worth), so the negative interest didn't really bother him; he just liked having the account "just in case".

 

[Texas Proud]

Just a question.... is this the bank rate of their treasuries


I do not think that there is a negative rate on deposits at banks... the vast majority of people would find another banks...

With treasuries, some investments have to use them... IOW, if there is a trust or some other financial instrument..... they might say that excess cash has to be invested in Swiss treasuries... so they have to do that even if the rate is negative...

 

[gcgang]

A negative interest rate on the deposit means they charge you for holding your money just like they made you a loan.

I'm not sure what articles you were reading. By the Swiss no longer supporting the euro at 1.20 to the franc, it resulted in a relative devaluation of almost (if not all) all currencies against the swiss franc. This made the swiss franc more valuable and it's definitely not a devaluation to the Swiss.

I am assuming that their central bank felt they couldn't keep pouring francs into the infinite rat hole to prop up the euro. If the ECB starts QE, it's likely that the pressure for people to move out of the euro would overwhelm them if they continued the 1.20.

This will ultimately make Switzerland even more expensive to visit and buy things from.

I see the Swiss Franc went from 1.20 to parity with the Euro.

I think the Swiss Franc is the real Bitcoin.

FXF, I think, is the ETF.


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[FIREd]

Just a question.... is this the bank rate of their treasuries


I do not think that there is a negative rate on deposits at banks... the vast majority of people would find another banks...

This is what I found on a Swiss news site (http://www.tdg.ch/economie/argentfinances/pouvons-satisfaire-monde/story/15520677):

The negative rate applies to money deposited by banks to the Swiss National Bank. The head of the national bank is quoted as saying that he does not expect banks to pass on that increased cost to savers and that he does not expect to see negative rates on Swiss savings accounts.

The stated goal is for the banks to stop hoarding money and invest it instead in the economy.

 

[imoldernu]

Here's a bit on the macro hedging derivatives. Appears the world-wide currency market will be big for the foreseeable future.

Hedge funds, speculators face big losses on Swiss franc rally | TODAYonline

I suppose the math part of this has become automatic, but the breadth of the transactions and risk management is beyond comprehension.

The money news channels are giddy. Even Lagarde looks surprised.

Gold... looking better.

India also cut rates:
http://www.newswire.ca/en/story/1473039/indian-market-soars-as-central-bank-unexpectedly-cuts-interest-rates

and... how to take advantage?

 

[GrayHare]

The stated goal is for the banks to stop hoarding money and invest it instead in the economy.

Applause! I wonder if such a sensibility will spread to the US Fed. Oh, wait, the Fed is the bank.

 

[MichaelB]

Another reminder that foreign exchange is a treacherous asset class.

 

[imoldernu]

Part of the fallout...

FXCM Inc (NYSE:FXCM) May Enter Insolvency

FXCM Inc, the largest US foreign-exchange brokerage, is struggling to keep up with capital requirements. It was down almost 15% on Thursday, and is down more than 75% in pre-market trading on Friday. A majority of clients suffered massive losses on their Swiss “safe-haven” trades.

 

[Running_Man]

Just a question.... is this the bank rate of their treasuries


I do not think that there is a negative rate on deposits at banks... the vast majority of people would find another banks...

With treasuries, some investments have to use them... IOW, if there is a trust or some other financial instrument..... they might say that excess cash has to be invested in Swiss treasuries... so they have to do that even if the rate is negative...

If you are a wealthy Russian or Arab you need to store your money somewhere and the negative interest rates on the Swiss bonds are not a deterrent and far preferable to losing 20 percent per year in currency losses. That is what happens to a safe haven currency and why Germany has such low interest rates in Europe.

If cutting interest rates below zero was the way to get out of a debt crisis it should have worked by now 7 years later. However it has supported stock prices for the last 7 years. I wonder if Swiss rates will drop to 1 or 2 percent negative?

 

[imoldernu]

If you are a wealthy Russian or Arab you need to store your money somewhere and the negative interest rates on the Swiss bonds are not a deterrent and far preferable to losing 20 percent per year in currency losses. That is what happens to a safe haven currency and why Germany has such low interest rates in Europe.

If cutting interest rates below zero was the way to get out of a debt crisis it should have worked by now 7 years later. However it has supported stock prices for the last 7 years. I wonder if Swiss rates will drop to 1 or 2 percent negative?

Yes... so far the US dollar is the safe haven. Now that the market is looking beyond Central Banks to the currency values, the shifts will be more obvious. Currently the Euro and European banks are seeing changes, but the search for true value looks to be going into the worldwide markets.

 

[Texas Proud]

If you are a wealthy Russian or Arab you need to store your money somewhere and the negative interest rates on the Swiss bonds are not a deterrent and far preferable to losing 20 percent per year in currency losses. That is what happens to a safe haven currency and why Germany has such low interest rates in Europe.

If cutting interest rates below zero was the way to get out of a debt crisis it should have worked by now 7 years later. However it has supported stock prices for the last 7 years. I wonder if Swiss rates will drop to 1 or 2 percent negative?

I agree.... but if I were a rich Russian and could not invest in US treasuries (which they probably could in London).... I would rather buy the German bonds at a small positive interest than the Swiss at a small negative interest....



As another reason to buy a Swiss bond instead of parking the money in a bank is that you take out the risk of the bank going under... IOW, it is better to have a -.75 rate where the Swiss gvmt owes you than a 0 rate where a bank that just cratered owes you.... this works as long as you had not invested in Greek bonds a few years back...

 

[RetireBy90]

If you are a wealthy Russian or Arab you need to store your money somewhere and the negative interest rates on the Swiss bonds are not a deterrent and far preferable to losing 20 percent per year in currency losses. That is what happens to a safe haven currency and why Germany has such low interest rates in Europe.

I look at it as the next step after the last year where return of capital (convinced you will get your $$ back) was more important than return on capital (increase my $$). Now if you were to pay a negative rate, you would be paying a slice to be convinced you will get the $$ back.

I'm wondering if I was a Russian or Arab or Japan or Chinese, and I had some $$ I wanted to put in a safe place, why would I choose a German bond at 0.04% or a Swiss at -0.04% rather than a US 10 year at <>2% ?
Gotta wonder if the FED will be able to raise rates. They may be able to raise the overnight rate they will pay, but will the market let them impact the 10yr or 30yr rates ? At some point if I was a wealthy guy looking to buy some bonds, I would come to the US bonds where I could get some small return. Why would I choose a rate that was negative? Will US 10 year be at 0.05% by the end of the year?

 

[gcgang]

As another reason to buy a Swiss bond instead of parking the money in a bank is that you take out the risk of the bank going under... IOW, it is better to have a -.75 rate where the Swiss gvmt owes you than a 0 rate where a bank that just cratered owes you.... this works as long as you had not invested in Greek bonds a few years back...

Swiss banks "crater"?


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[Texas Proud]

Swiss banks "crater"?


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Some were in trouble a few years back... so yes, it can happen...

Also remember that the US gvmt was threatening to prevent some from having access to the US banking system and fine the heck out of them for hiding assets of rich Americans....

 

[audreyh1]

I look at it as the next step after the last year where return of capital (convinced you will get your $$ back) was more important than return on capital (increase my $$). Now if you were to pay a negative rate, you would be paying a slice to be convinced you will get the $$ back.

I'm wondering if I was a Russian or Arab or Japan or Chinese, and I had some $$ I wanted to put in a safe place, why would I choose a German bond at 0.04% or a Swiss at -0.04% rather than a US 10 year at <>2% ?
Gotta wonder if the FED will be able to raise rates. They may be able to raise the overnight rate they will pay, but will the market let them impact the 10yr or 30yr rates ? At some point if I was a wealthy guy looking to buy some bonds, I would come to the US bonds where I could get some small return. Why would I choose a rate that was negative? Will US 10 year be at 0.05% by the end of the year?

The Fed is not trying to raise the 10 or 30 year interest rates. They can only raise the Fed funds rate. They'd probably prefer long rates stay down.

 

[Mulligan]

I am sure I am missing the ying and the yang of it all, but it seems like the Fed is missing a glorious opportunity to sell off as much of the balance sheet as possible at a huge non taxed capital gain. If everyone wants our bonds, then here is a bunch more for you.... Clean up the balance sheet push the risk on to the foreign buyers and have dry powder again for another round of QE down the road!


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[imoldernu]

My thinking is that the bank hedge funds are the winners in all of this. Trading in futures based on governments' decision is a great money pit for the TBTF banks, especially with the revisions to Dodd Frank, which guarantees their bad bets.
Not for me.
Russia, Venezeula, Ireland, Greece, Brazil, Sweden, France, Germany, China, Japan and a few more... What and when will their conditions change?

But then, I really don't understand this.

 

[Running_Man]

I look at it as the next step after the last year where return of capital (convinced you will get your $$ back) was more important than return on capital (increase my $$). Now if you were to pay a negative rate, you would be paying a slice to be convinced you will get the $$ back.

I'm wondering if I was a Russian or Arab or Japan or Chinese, and I had some $$ I wanted to put in a safe place, why would I choose a German bond at 0.04% or a Swiss at -0.04% rather than a US 10 year at <>2% ?
Gotta wonder if the FED will be able to raise rates. They may be able to raise the overnight rate they will pay, but will the market let them impact the 10yr or 30yr rates ? At some point if I was a wealthy guy looking to buy some bonds, I would come to the US bonds where I could get some small return. Why would I choose a rate that was negative? Will US 10 year be at 0.05% by the end of the year?

The reason you choose Swiss is because historically that is what you do. The United States has the most reporting of any country and most foreigners do not want anything to do with our banks or government bonds, that I have seen if you are a rich Russian or Arab you probably do not want to end up on 60 Minutes, which will not happen in Switzerland. Germany has tough banking laws and if you think the Euro is going to implode you would not invest there, so by default Swiss is the safest and why the interest rate is negative, if all interest rates were the same no rich Arab or Russian would invest in USA.

 

[NW-Bound]

This is what I found on a Swiss news site (http://www.tdg.ch/economie/argentfinances/pouvons-satisfaire-monde/story/15520677):

The negative rate applies to money deposited by banks to the Swiss National Bank. The head of the national bank is quoted as saying that he does not expect banks to pass on that increased cost to savers and that he does not expect to see negative rates on Swiss savings accounts.

The stated goal is for the banks to stop hoarding money and invest it instead in the economy.

The inflation rate in the EU block has fallen down to -0.2% in Dec 2014. For comparison, its lowest inflation rate was -0.6% in 2009 at the height of the global recession. So, even though they charge member banks for depositing money, the purchasing power is still not lost because of deflation.

Now, compare the above to the US where the Fed fund rate is about 0.13%, but the US inflation is 0.76% in Dec 2014. Hey, that is worse than the EU, because you lose 0.63% while in the EU you break even.

The Swiss central bank move is just the latest. The EU central bank already made that move in Sep 2014. Sweden made the cut in July 2014, and Denmark in Sep 2014. Fun time!

See: Less Than Zero - QuickTake - Bloomberg.

 

[sengsational]

Why take a negative interest rate when you could take currency from the teller to the safe deposit box?

 

[NW-Bound]

... or to your mattress.

Individuals would do that, but a bank would have problem moving its cash reserve in the market place to/fro the hideout.

 

[sengsational]