Last week, we had a first in bond history; the Germany Finance Agency swung for the fences, auctioning off €2 billion of a 30-year Bund with a zero coupon and a negative yield to maturity at offering. It wasn’t exactly a home run; with only €824 million of allotted orders, the Bundesbank was left to buy nearly two-thirds of the offering. This brings in light the paradox of the European bond market – investors are happy to see yields go below zero, because they make money on higher coupon bonds they own, but they’re not willing to line up to essentially pay for the right to hold a German bond.
Maybe investors were hoping a day like this would never come, but now, they must face reality. With governments coping with the threat of a recession, fiscal stimulus – a major possibility in Germany – will be back on the agenda and with it will come deficits….and the need to issue more bonds. The ECB has another round of easing up its sleeves which would push rates down even further. So while long duration buyers were shy about getting on board and paying for a negative return this time, they might eventually have to bite the bullet and accept the reality that is a negative interest rate regime in Europe’s largest economy for the time being. For the German Finance Agency, maybe this was just a pre-season game; on September 18th, it will re-open and sell €1.5 billion of a 30-year Bund which is currently trading to yield -0.25%. On that day, we’ll be closely watching to see how many long-duration investors play ball.
Vice President and Portfolio Manager
Active and Strategic Fixed Income Team
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