So! Lots of signs of the apocalypse to choose from today. The Dow is down over almost 3%. The 10-year is yielding under 2.5%. Europe is sucking more countries into the vortex. Even gold is down somehow. Most ominously of all, Dealbreaker has been down all morning and afternoon, for reasons that are not clear to us but that we’re going to blame on interference from LightSquared anyway.
But our favorite harbinger of doom has to be the WSJ's report that Bank of New York Mellon is now paying (0.13%) interest on large deposits – that is, if you want them to watch your money for you (and you’ve got over $50mm), you pay them 13bps. Negative rates on short-dated Treasuries are back, and negative real interest rates have been pretty common recently, but negative rates on large bank deposits are new to us. (Or not new exactly, since lots of people have fee checking accounts, but most of them don’t have $50 million in the bank.)
We have to assume that this is not a price but a penalty – that is, BNY Mellon doesn’t really want you to take them up on their offer. They’re paying 10bps for FDIC insurance, and there’s some cost to them in terms of increased capital requirements for big inflows of deposits. And they’re telling clients that the fees will go away if and when they can redeploy these deposits economically.
Still this seems like it may lure some corporate depositors. Companies aren’t looking to spend money on their businesses. Activists aren’t exactly pushing them to use their cash hoards. Stock buybacks have some appeal in this tape, but that might feel a bit wrong to a corporate treasurer in full-on freak-out mode.
Sure they could go buy Treasuries with their cash and get higher (er, less negative) yields, but besides incurring duration risk (how much lower can yields really go? don’t answer that), a BNY Mellon deposit is safer. Not only is its bank rated Aaa/AA, but these deposits are FDIC insured, meaning that they’re backed both by the U.S. government and by a Aaa/AA rated financial institution. The alternative way to get that kind of credit profile would be to buy Treasuries and Treasury CDS – but BoNY’s (0.13%) all-in yield seems more attractive than a (0.03%) Treasury yield plus a ~45bps CDS rate.*
Now, if you’ll excuse us, we’re going to go try to refinance our mortgage at Bank of New York.
* Yes, we know, demand versus term, but still.