In the recent time-series of bonds issued by (for example) Germany, Austria and France we see an unfamiliar phenomenon: negative yields. This is mainly the issue on the short end of the yield curve. For a picture see: http://www.ecb.europa.eu/stats/money/yc/html/index.en.html
My question is, why banks or possibly other companies are willing to pay a government for holding their money?
Would it not make more sense to simply hold the cash instead? Stuffing cash under the mattress may be risky and costly for an individual but not for a financial institution. A bank may park money in an ECB account and get a minimal but positive overnight rate for doing so, right?
Answer
Taking the case of companies other than the bank, when you have a large amount of cash, you won't stock it in your backyard as there would be insurance and logistics costs that would cost you more than the negative government yield.
I believe the main reason why people are willing to accept the negative yield is essentially for counterparty risk diversification reasons. Putting your money in a single bank makes you vulnerable to the default risk of that bank (and don't even think it doesn't exist). So you can diversify through several banks but you're still exposed to the overall banking sector risk. So, the next step is to diversify using government bonds, which are likely to be safer than banks. I've seen it used for foreign exchange trades where you don't want to take the risk of a bank for example.
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