Fears over slow economic growth continues to cause ripples worldwide – and Germany is the latest country to feel the effects.
Germany’s economy, seen as the powerhouse of the eurozone, has faced a difficult few months, and a fall in its bund yield below zero for the first time has caused many financial commentators to weigh up the significance of the milestone.
Safe haven
An article by Lukanyo Mnyanda and Marianna Duarte De Aragao for
Bloomberg describes the event as another bond market milestone created by investors’ “seemingly insatiable demand for haven assets”, and notes that Germany “joined Japan and Switzerland in having ten-year bond yields of less than zero”.
The article quotes Jussi Hiljanen, Head of European Macro- and Fixed-income Strategy at SEB AB in Stockholm: “Nobody buys bunds at these yield levels thinking they are attractive. Demand for haven assets is being driven by fear of Brexit and growth concern. Investors are buying bunds as a hedge against uncertainty.”
Mnyanda and De Aragao highlight a tweet from Bill Gross, manager of the $1.4bn Janus Global Unconstrained Bond Fund, who warned that negative yields are like “a supernova that will explode one day”. They also quote Andreas Gruber, Chief Investment Officer of Allianz SE, who says that German bunds are in “bubble territory”.
Bloomberg article
Bubble trouble
The spectre of a bond bubble burst is also raised by
The Independent’s Hamish McRae, who says that "large chunks of the developed world are becoming more like Japan, with no economic growth and limited opportunities for the next generation to find decent jobs”.
Referring to the German bund dipping into minus figures, McRae says: “When extreme things happen, you have to ask why. There are two broad explanations, aside from the generic one that sometimes investors go a bit loopy.
$10tn
The value of global sovereign bonds with negative yields
“One is that this is the technical outcome of the extreme monetary policy followed by the world’s main central banks: spraying money around by buying up bonds … The other is to say that investors are in despair. They have given up. They think the world economy is going to tank and they had better own anything that gives some sort of cash return, however miniscule.”
McRae forecasts that these extreme market conditions may well continue for some time, but adds that “when the reaction comes, it is sharper and more vicious than anyone expects”.
The Independent article
Looking ahead
A “sharp correction” in Germany’s bund is something that investors should be aware of, says
MarketWatch’s Ellie Ismailidou. She says that the German bund news means it joins a club of many other sovereign bonds that suffer negative yields, pointing out that there are over $10tn worth below zero globally.
Ismailidou says: “The German bund yield in particular has been pushed down over the past year by the European Central Bank’s purchases of more than €1tn of mainly government bonds across the eurozone since it launched its quantitative easing program 15 months ago.”
A quote from BMO Capital Markets Interest Rate Strategist Aaron Kohli described the sentiment on Wall Street regarding the negative yield as “another one bites the dust”. He added that because the ten-year bund is Europe’s benchmark, the “shock effect” of falling bond yields worldwide had been amplified.
MarketWatch article