[cameldrv]

Can't banks just deposit the money as reserves with the ECB and earn zero? I suppose in the 30 year case maybe you're assuming that the ECB won't pay zero on reserves in the future, but how does that explain the short term rates?

[fauigerzigerk]

The ECB charges for deposits as well. The deposit rate is -0.4%

https://www.ecb.europa.eu/stats/policy_and_exchange_rates/ke...

[wahern]

The ECB deposit rate has been negative since 2014. The role of central banks during slow growth is to coax banks to lend, not to hoard cash. When growth is high they increase deposit rates to take money out of circulation.

[ryanobjc]

Can they?

Most 'central banks' dont really offer banking services. Eg: you can't deposit to the federal reserve.

So the question is what to do with your money, that is both (a) easily transferable (b) auditable (c) safe

Government bonds are the traditional answers to these. They offer all of a,b,c. And until now they even offered extra money, aka interest, as bonus.

I think the best way to understand bonds is the old fashioned paper bonds. There was 2 parts: a primary part representing the money down, and a detachable 'coupon', say 5 of them for yearly interest for five years. So every year you'd bring the appropriate coupon in and get your interest. At the end, you'd get your money back which is represented by the main bond. Or more likely trade it for another bond.

All this means is the coupons now represent how much you have to PAY the government for issuing the bond. So it's more like a maintenance fee, rather than 'interest'. Or another analogy, safe deposit box fee. Bank account fees. Etc.

Money in the mattress, in physical vaults, safe deposit boxes all have the following property: (a) difficult to value (gotta count all those bills! who's doing the counting? is it auditable? did any 'shrink' somehow?) (b) costs quite a bit of money to just store ($100m is a lot of bills! it weighs a lot! it can get set on fire!) (c) not so easy to transfer.

As a result of all of the above, it's unlikely to be usable as collateral. Since the primary target is banks, they need 'liquid' assets that they can present to their auditors to prove they have reserves for their deposits.

[cameldrv]

I wasn't aware that ECB reserves had a negative rate. To your point though, if you're a bank and a member of the Federal Reserve System, you definitely can deposit to the Federal Reserve. Banks have a reserve requirement as you mentioned, and in my understanding, that must either be in cash in the vault or deposits with the Fed. I believe the ECB operates with similar rules.

[qubex]

The ECB’s rates are short-term; who’s to say that they won’t turn acutely negative for at least some proportion of the next three decades? These rates are “locked-in”, provided you hold the bond to maturity (and might have an upside later on).