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Capital Markets

The perfect time for Germany to bail out Europe

Market players are betting that German yields will sink further into negative territory - in theory, boosting its financing power to sign that blank cheque.


A now-painfully well-known adage: financial repression - bad for savers; good for sovereign treasurers. 

But the rally in Bunds this week is pretty dramatic. Fuelled by fears over the likelihood of Greece exiting the euro and the lack of a clear and actionable plan by Europe’s leaders to prevent that from happening, investors continued their flight to quality by pouring more money into Bunds on Wednesday, sending the 10-year and 30-year Bund yields down to record lows. 

Ten-year yields fell to an all time low of 1.376% while 30-year yields closed below 2% for the first time ever at 1.992%. Investors’ demand for Germany wasn’t confined to the long-end of the curve either. At auction, Germany’s two-year bonds, known as Schatz, were 1.7 times oversubscribed by investors who were keen to snap up a zero percent coupon yielding as little as 0.02% – well below equivalent US and Japanese bonds. 

Given the oversubscription for the two-year bonds and persistent fears over Greece, this in turn prompted questions around whether Germany would issue debt offering negative yields, in effect incurring a small capital loss for investors. 

Jim Reid at Deutsche Bank, wrote in research report on Thursday: “Our favourite headline of the day was the one that suggested Germany won''t issue bonds with negative coupons...Imagine having to pay for the privilege of allowing a country to run up debts, especially one that might have to eventually backstop the whole of Europe.”

However, Steven Major of HSBC believes that it’s not outside the realms of possibility that German two-year bond yields could fall below the zero barrier. He told Dow Jones Newswire that yields of negative 50 basis points or even negative 100 basis points “is not impossible”, and particularly if a scenario emerges whereby the eurozone breaks-up and Germany is then forced to bring back its own currency.

Whether that is a scenario the market is willing to bet on or not, there has rarely been a better time for Germany to borrow/bailout Europe.

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Source: Bloomberg

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