Flood of Cash Pushes Borrowing Costs to Unusual Lows in Europe

Link: https://www.wsj.com/articles/flood-of-cash-pushes-borrowing-costs-to-unusual-lows-in-europe-11612780202


Italy’s Enel SpA, one of Europe’s biggest electricity producers, has short-term commercial paper that recently offered an annualized yield of minus 0.61%, according to FactSet: That is 0.11 percentage point lower than the ECB’s deposit rate of minus 0.5%.

When interest rates are negative, borrowers pay back less than they were lent when their debt comes due. At Enel’s rate, if it borrowed $100 for a year, it would pay back $99.39. For the lender, in this case the money-market funds that buy commercial paper, the opposite is true. They get back less money.

“It took a couple of years for clients to get their heads around the idea that they’d have to pay to leave money in a safe spot,” said Kim Hochfeld, global head of State Street’s cash business. State Street’s EUR Liquidity LVNAV Fund — worth 6.6 billion euros, equivalent to $7.9 billion — yields minus 0.68% after fees, but that compares with total costs on large bank deposits of up to 1%, she added.

Author(s): Paul J. Davies

Publication Date: 8 February 2021

Publication Site: Wall Street Journal