Germany has a new test of investors’ voracious appetite for bonds with very low or even negative yields: a 30-year bond that offers no interest payments at all.
Wednesday’s auction of a new €2 billion bond maturing in 2050 marks the first time that Berlin has issued 30-year debt with a zero per cent coupon – a step it has already taken with 10-year bonds.
Investors have piled into German Bunds – the euro zone’s benchmark safe asset – in recent weeks amid concerns about flagging global growth and expectations that the European Central Bank is poised to present a fresh package of easing measures. Germany’s central bank warned on Monday that Europe’s largest economy was likely to tip into recession in the third quarter, as global trade tensions hit exports from its huge industrial sector.
Prices have risen to the point where the entirety of the German bond market is trading at a yield of less than zero, which means that buyers are certain to get back less than they paid, via interest and principal, if they hold the bond to maturity. If Wednesday’s new bond prices roughly in line with secondary-market yields, buyers will be handing over about €103 for every €100 they will get back when it matures. The zero coupon means investors who hold the bond until it matures will not receive a cent until 2050.
‘Lousy investment’
“As a bond investor the idea of buying something and getting less than you paid in 30 years’ time feels like a lousy investment,” said Mark Dowding, chief investment officer at BlueBay Asset Management. “But the reality of the market is we are set to stay in this negative interest rate environment as far as the eye can see. I don’t think they’ll have any problems clearing a price well above par.”
Some analysts are watching carefully for any sign that demand for debt at subzero yields is flagging. Ralf Preusser of Bank of America Merrill Lynch sees echoes of early 2015, when a weak auction sparked a sharp sell-off in German Bunds following big gains in anticipation of the ECB’s bond-buying programme – an episode labelled the “Bund tantrum”.
“The risk is that at these yield levels, the [German finance agency] will eventually encounter a buyers’ strike,” Mr Preusser said.
Higher spending
Germany’s debt rally has fizzled in recent days following reports that the government was considering responding to the downturn with higher spending. But a relaxation of the cast-iron commitment to running a balanced budget will not be enough to alleviate the shortage of German bonds on the market, particularly with the ECB poised to start buying them again, according to Pooja Kumra, senior European rates strategist at TD Securities.
“I don’t think we’ll see a significant increase in bond issuance,” she said. “It’s hard to see too much of a sell-off when everyone knows the ECB is coming with a full-blown package in September.”
For now, said Carsten Brzeski, chief economist for Germany at ING, the new bond issue is likely to intensify debate over the country’s fiscal stance.
“Investors are really throwing money at Germany and saying ‘please borrow more,’” he said. “At the very least, the government should refinance some of its older debt at these incredibly cheap rates.” – Copyright The Financial Times Limited 2019
