AAA-rated Euro government bonds are currently yielding below -0.4% out to 4 years. For example, the 3-month is yielding -0.71%.
I assume banks can't profitably short these bonds and deposit the proceeds at the ECB, due to borrowing fees. But why isn't anyone doing the following - not exactly arbitrage, but at least an apparent business opportunity:
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Create a bank* which has a single purpose: Deposit client money at the ECB at -0.4%.
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Pay clients -0.41% or whatever in interest, pocket the difference.
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The investment is risk-free from the client's perspective, since the bank doesn't have any debt (except for the client deposits, of course). So instead of getting -0.71% with the residual risk of goverment default, they get a truly risk-free -0.41%. So they should prefer it to short-term bonds.
* Or whatever is the least-overhead kind of entity you need to be, exactly, to deposit money at the ECB.
I know this probably doesn't work for some reason, but I'd be interested in knowing where it fails :)
Submitted May 27, 2017 at 08:53AM by inv252 http://ift.tt/2s708A4
