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I live in a eurozone country. While the ECBs deposit facility rate is 3.75%, interest rates on savings accounts and similar low-risk products are less than 1% with the best offer being 2%.

Overnight rate swap ETFs like LU0290358497 should have a return of just below the deposit facility rate - let's say 3.5%.

The Risk Indicator (PRIIPS methodology) is 1, indicating a very low-risk investment. I understand the risk is likely higher vs. secured deposits, but with the insolvency of a large (or a series of large) banks, I assume the deposit security schemes would be strained as well? When my bank would fail, I would be waiting for an official resolution. With the swap, I assume at worst I could liquidate with a loss (someone else would take the risk of not getting their money or not getting it soon)?

I'm considering using a product like that for short-term investments during high-rate periods. Like emergency funds or excess cash in business accounts.

Am I missing something?

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2 Answers 2

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I'm not familiar enough with overnight swap rate to say yea or nay, but a few thoughts:

It's all trade-offs. To get better returns than a ban offers in a normal account, you are always going to accept some additional risk.

The smallest risk increment here in the US, and the one I use for my own emergency funds, is a rotating set of Certificates of Deposit. In a CD, your principal is safe and you just risk some of the interest if you have to cash out early. Having the money spread across several CDs maturing at different times through the year lets you cash out one in a hurry if you need to,then take the rest of the cash at a time when you can do so without that penalty; that gets you close to the return rate of the longer term CD with close to the flexibility of the shorter term. Rates on CDs aren't exciting, but they're very safe.

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    Thank you for your answer @keshlam. I'm looking for something more flexible than that. CDs (term deposits) here have a rate of up to 3%, which would be comparable (currently, but rates can go higher) to the overnight swap ETF, but are very inflexible. While I could use it for the emergency fund, it would be unusable for excess business account cash. There, the term is always less than year - until the next profit payout. This answer could definitely help someone else, though!
    – kubek
    Aug 13, 2023 at 14:58
  • Websearch "high yield savings accounts" and money market accounts. Your local bank(s) would be delighted to explain the tradeoffs involved in these.
    – keshlam
    Aug 13, 2023 at 15:37
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I have spent the last week talking through this with my friends and thinking about this, and I think I have my conclusion. If there is anyone more experienced/knowledgeable on overnight rate swaps, I would greatly appreciate an answer still.

Yes, it seems it could be a viable alternative with two caveats:

  1. As mentioned in my question, bank accounts covered by deposit protection schemes are almost certainly safer, as regular bank accounts will have a higher priority in the case of a banking collapse. Unsecured money markets are still very important for banking confidence, so we would have to be talking about major systematic problems.
  2. The main and more likely risk comes when the interest rates would swiftly move down. Like when the pandemic hit. Then, the interest on a product like that would not only go down, it would even go negative. So it is important to watch out for interest rate changes.

Whether the added risk and the need to keep an eye on the central bank decisions (and predictions) is worth it, is up to everybody to decide, I guess. If someone is already interested in economics and watching banking news closely regardless, it may be.

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  • I have since noticed a financial product that is meant as an alternative to savings accounts and openly discusses the allocation - where it mentions the overnight rate swap. This alone does not mean it is a viable alternative, but at least it means a relatively reputable company is willing to claim that, so I will accept this answer.
    – kubek
    Oct 17, 2023 at 13:20

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