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You’d Better Have A Really Big Mattress.

In Investment Returns on August 4, 2011 by CQCA

Nominal interest rates have just gone negative. That is how screwed we are.

From the WSJ:

“They say that nothing comes for free, and now that includes cash.

Bank of New York, the world’s biggest custodian bank, announced it is charging a fee of 13 basis points for unusually large cash deposits.

That has pushed money funds to move even more of their cash into already in-demand T-bills, short-term agency notes and Treasury repos.

“By forcing cash out into the marketplace, demand for money-fund investments is only going to grow, forcing investors into a pool with already incredibly shallow options,” says a money fund manager. “Most importantly, if other banks follow suit, then yield levels as a whole will have no where to go but lower as investors look to remain invested.”

Three-month T-bills recently yielded 0.008%, and short-term bills have been darting in and out of negative territory this morning.”

The real interest rate, meaning the nominal interest rate minus the inflation rate, has been negative for a long time. However, we have at least been keeping the illusion going by setting nominal interest rates higher than zero. When nominal interest rates are lower than zero, it becomes more wise to keep your money stored under your mattress. The $25 trillion that the Bank of New York Mellon has under custody and administration will have to find a pretty big mattress.

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