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I must. I must say something. 

There is a raging debate going on about what negative rates signify and how far they can go. I have weighed into the discussion with my post from January 19th, but I feel compelled to get back to it.

Too many people speak of the conundrum of being “paid to borrow” and discussing lower bound on interest rates as the cost of “storage” of cash.

I have bad news and bad news for an individual investor.

1. No one will pay you to borrow money in any country. Unless…see below.

2. You might have to pay for the privilege of having safe and liquid cash, immediately available for investment.

Sovereign bonds trading at negative yield doesn’t mean that “people” are getting paid to borrow. It means governments are paying themselves to borrow with printed cash and are stringing all the investors along.

Negative borrowing rates exist for entities which HAVE SOVEREIGN DEBT AS COLLATERAL TO OFFER.

Now imagine that the “overnight” rate is -2% (negative). This is the price for quick and save liquidity. Then it might make sense for leveraged investors to own 5yr notes at -1% yield for two reasons.

1. They can lend the note overnight to earn 1% carry

2. You need fast and safe money and would rather pay 1% than 2% to keep it.

Some people will put cash under the mattress. But high turnaround business from banks to grocery story need fast cash. As long as the central bank can keep overnight rate negative enough and buy enough longer term sovereign debt, the rest will be bought by the leveraged speculators, no matter what the allocators think.