Defying Logic: Germany Sells 30-Year Bonds for Negative Yields

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The media loves pointing to the inverted yield curve, negative interest rates and the imminent recession. There might be a reason why it matters, even if the media keeps jumping the gun about the recession risks today. What matters on August 21, 2019, is that the government of Germany sold 30-year bunds (their term for bonds) at a negative yield for the first time.

All of Germany’s note and bund benchmarks have traded with negative yields in August, but the translation here is that investors are effectively loaning money to Germany and accepting less money back than they gave over the course of 30 years. Two key ways to look at this: investors are paying the government just to hold on to their money, or they are effectively guaranteeing losses every single year for the next 30 years just to get some capital back at that time.

Germany’s 30-year offering was just €824 million, or about $914 million in U.S. dollars. These bonds actually pay no interest and were issued above par value (100.00). At maturity in 2050, Germany will hand these bund buyers back roughly €795 million.

According to Bloomberg, the German 30-year bund yield is now −0.15%.

It is amazing to consider that negative interest rates have managed to work their way into such long-term debt in Europe. Germany is considered to be the safest of the large European economies within the European Union, and in some ways the euro is the modern version of a watered-down Deutsche mark.

The global slowdown, weak car exports from Germany, the U.S. and China trade war, and an expected ease by the European Central Bank in September are all driving this trade, as well as the European Central Bank still buying up any bond it can get its hands on.

Explaining negative interest rates is arcane, almost as if it were medieval times and peasants were so desperate to protect their few coins they own from brigands and warlords that they were willing to pay to keep it in the local castle.

Another issue driving demand, even at negative rates, is that asset managers are using these as hedges and locking in (negative) returns against their longer-dated obligations.

As a reminder, just because an investor buys a negative yield for 30 years doesn’t mean they can’t still make money over time. The markets control long-term rates, and if the market is willing to have a yield of −0.10% today there is no law or market force preventing that rate from going to −1.00% ahead.

The markets seem to find new ways of creating bubbles and keeping demand high regardless of what logic might try to dictate at any given time. This is the sort of instance that can theoretically have serious ramifications for entities with solid credit. Borrowers with perfect credit could theoretically get mortgages with negative yields, effectively getting paid to take out loans, and corporations with AAA credit ratings might get paid by investors to take on more debt. What will financial market historians have to say about this?


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