A welcome benefit of the collapse in oil prices and of falling inflation more generally is that the return on cash in much of the world is now positive in real terms.

All the more paradoxical, then, that investors are cheerfully accepting negative yields on increasing amounts of sovereign debt. Well over $3tn of government bonds is reckoned to have negative nominal interest rates. There was no heist of this kind, with investors paying for the privilege of lending to governments, even in the Great Depression of the 1930s.

The nub of the story is that a global savings glut is confronting a shortage of safe assets. Credit quality generally diminished after the financial crisis, not least because so many triple A rated structured products turned out to be dross.

And the perceived pool of really safe assets — chiefly the bonds of governments that have their own currency and central bank — diminished at the outset of the eurozone sovereign debt crisis when investors twigged that in the absence of a power to print money individual eurozone countries were subject to default risk.

The definition of safety is admittedly fluid and the pool of safe assets changes according to market perception. Since Mario Draghi, president of the European Central Bank, pledged to do “whatever it takes” to keep the monetary union intact, much eurozone sovereign paper is now thought safe again, with the obvious exception of Greece.

Yet the supply of other safe assets has been dwindling. In the global government bond market demand exceeds supply, not least because of central bank buying. With the US budget deficit declining and the Treasury extending the maturity of IOUs, issuance of short-term Treasury paper has been cut back.

Chart: Repo balances have fallen at most US banks

And if the definition of safe assets is extended to include repurchase agreements, or repos, which are collateralised short-term loans, the shrinkage is even sharper.

Economists at Barclays reckon that repo balances have fallen from more than $5tn before the crisis to about $2.5tn today. They expect them to decline by a further $500bn. This is partly driven by risk-averse behaviour along with investor deleveraging, partly by tougher regulation of banks.

Then there is the case of deposits in banks that are too big to fail. Since such unsecured deposits enjoy a de facto state guarantee courtesy of the taxpayer, they are as good as sovereign debt. Yet a new supplementary leverage ratio makes it less attractive for these banks to take on large uninsured deposits.

Hence recent requests to customers by JPMorgan and others to take their cash elsewhere unless they are prepared to pay a fee to make a non-interest earning deposit — a complete inversion of the wisdom of Ogden Nash, who said “most bankers dwell in marble halls, which they get to dwell in because they encourage deposits and discourage withdrawals”.

For good measure we now have the ECB preparing to mop up most of the net bond issuance of eurozone governments through quantitative easing. So safe assets are to become even scarcer.

On the demand side, the pressure stems partly from post-crisis regulation that forces financial institutions to buy domestic government bonds. Still more important, though, is the fact that financial sector development in emerging markets has lagged behind growth in savings.

Hence the extreme nature of a search for yield that has now gone, like Alice, through the looking glass into a negative-yielding nether world. This is worrying, because markets that lack an adequate supply of safe stores of value may be more vulnerable to systemic instability. It is also disconcerting for investors, especially those seeking to match pension liabilities.

With more than $3tn of bonds in negative yield territory it also seems likely that demand from passive or index-tracking investors is adding to the underlying pressure.

Other investors may be looking for currency appreciation or deflation in goods prices to offset the nominal income shortfall. And as in all overheated markets, there will be those who are buying expensively on the assumption they will be able to pass the parcel to a greater fool.

With the ECB embarking on unconventional monetary policy, this casts Mario Draghi in motley. Yet such are the uncertainties in this heavily rigged market that it is hard to be sure who is really fooling whom.

The writer is an FT columnist

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