Negative rates could see launch of vault bonds or ETFs


Negative interest rates could soon drive the development of ETFs based on cash placed in vaults, says Columbia Threadneedle.

“It’s probably only a matter of time before a vault bond or a vault ETF is introduced,” says Maya Bhandari, a portfolio manager and member of the global asset allocation team at Columbia Threadneedle.

Japan surprised markets in January when it introduced an interest rate of -0.1 per cent, following in the footsteps of Sweden, Denmark and Switzerland. In Hungary negative interest rates were introduced in March. In April, the ECB kept interest rates on the deposit facility at -0.4 per cent.

Bhandari suggests that negative rates will lead to more product innovation by investment banks for investors who want to invest in cash but don’t want to lock in the full loss of the negative rates offered by banks.

In the example suggested by Bhandari, investors would be offered a bond yielding -0.2 per cent, backed by a five-year German bond locked in at a -0.38 per cent loss. The underlying euro notes would sit in a bank vault.

The asset manager would cover the costs of the vault and product development through the 20 basis point charge on the product. 

Bhandari says Columbia Threadneedle has no plans to develop this product itself.

“One of the key pieces on this discussion on negative interest rates is you’re comparing it with cash, which arguably costs zero, but it doesn’t, because you’ve got the cost of your vault, the cost of your security, the guards you need to keep your box safe and so on. There’s an economies of scale argument for people who are selling the vault fund,” Bhandari says.

“If you took the negative interest argument to the extreme the conclusion is that deposit rates for individuals like you and I go negative, then that might be something that you and I might think about doing.”

German insurer Munich Re announced in March it was storing €10m in two different currencies in a vault to avoid paying negative interest rates to deposit its cash.

Sales of home safes also reportedly went up in Japan when it moved into negative interest rate territory.

However, Bhandari argues that the development of such a vault bond or ETF product would set a price floor for negative interest rates because it would impede the impacts of central bank policy, which aims to push investors out of cash and into riskier assets.

Last week the ECB scrapped the €500 note, with many speculating this was to discourage the use of bank vaults for stashing cash.

M&G head of retail fixed interest Jim Leaviss told this week’s Morningstar Investment Conference that this could result in the value of €500 notes already in circulation rising.