Investors and savers — those who buy bonds and put money in bank deposits — are paying banks to hold onto and use their money.

Mark Kiesel, chief investment officer for Global Credit at Pacific Investment Management, recently warned investors on Bloomberg TV about bonds paying negative interest rates.

The amount of such “negative-yielding” bonds has mushroomed since September and is now $3 trillion.

According to Bank of America, the quantity of negative-yielding bonds is almost double the amount of investment-grade corporate debt.

The background

Here are some questions and answers on this issue:

What is a negative interest rate?

Instead of receiving a positive return from a bond purchase or on a deposit at a bank, investors actually lose part of their principal.

Why are negative interest rate bonds risky?

In the scenario of a bond paying a negative interest rate, the bond holder initially invests $1,000. At maturity, the borrower is obligated to only repay $900.

Even worse is a scenario in which bonds again are paying normal rates of interest and the investor wants to unload his bond holding before it matures. Under these conditions, an investor holding negative-yielding bonds must sell his holdings at a major discount, possibly $600, to induce somebody to take this security off his hands.

Why are banks charging people to keep their money?

1. Banks blame the costs of new liquidity and capital regulations. Under new regulations, the banks must hold reserves of as much as 40 percent against certain large corporate deposits and as much as 100 percent of some big deposits from hedge funds. This makes it unprofitable to hold deposits for large corporations or hedge funds. In January, JPMorgan Chase told some clients that it would begin charging monthly fees on deposit accounts from which clients can withdraw money at any time.

2. In today’s slow-growth economy, banks either cannot make loans or must lend at such low rates that depositor balances are unprofitable. Historically, banks made loans yielding higher rates than what they paid depositors.

Why are large depositors will to pay banks to hold their money?

1. Depositors will tolerate rates below zero because withdrawing cash and storing it themselves is costly and inconvenient.

2. If investors believe that interest rates will become even more negative, allowing them to sell their bonds at a profit. Bond prices rise when interest rates fall.

3. Investors will invest money at a negative rate if they expect its currency to rise in value. Owning Swiss bonds is a prime example.

Why has the European Central bank reduced official interest rates to record lows?

The ECB is pumping billions of euros into the economy to boost growth and prevent deflation. Consumer prices across the European Union fell in January at the fastest rate since record keeping began in 1997.

Why in deflationary times are the real costs of borrowing so high?

Borrowers’ paychecks are shrinking or they are receiving less for the goods and services they produce. Thus, they have less cash to repay both their interest costs and the principal.

The conclusion

What is my reaction to negative interest rates?

I feel most uncomfortable with negative interest rates. It seems irrational that lenders are now locking in guaranteed losses on the loans they make. Investors in bonds paying negative interest rates will sustain major capital losses when we return to the historical scenario of positive interest rates.

To eliminate negative interest rates, the Eurozone needs to:

1. Stop relying solely on monetary policy.

2. Embrace fiscal policies to reinitiate growth.

Modern industrial societies require an appropriate return to lenders to provide the money necessary for investment in new factories and equipment.

Without ongoing investment, infrastructure will deteriorate and per capita income will decline.

Originally published in the Sarasota Herald-Tribune