Negative Yields
An auction of German government short-term bonds produced Negative Yields for the first time ever, providing stark evidence that an increasingly nervous European financial community is opting for security and liquidity over any semblance of returns.
Germany’s issue of €3.9-billion ($5.1-billion) of six-month treasury bills on Monday resulted in an average yield of minus 0.0122 per cent. German officials confirmed it was the first time the country had ever sold government debt securities at a negative yield – a rare circumstance in which buyers actually pay for the privilege of lending money to the debt issuer.
“It just underpins how nervous the overall market is,†David Schnautz, fixed-income strategist with Commerzbank AG in London, told Bloomberg News. “[Investors] are okay donating some of their money to Germany, just to make sure they get it back.â€
The auction took place in the shadow of a key meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy, after which the two leaders stressed the need for faster progress on the proposed restructuring of Greece’s troubled debts.
Negative yields have begun to pop up with growing frequency as Europe’s sovereign-debt woes linger. High-quality government issuers such as Switzerland, Denmark and the Netherlands have all sold bonds at negative yields recently, and German short-term bills have traded in negative territory on the open market for the past several weeks.
“It’s a sign that risk avoidance is the main name of the game,†said Marlene Puffer, managing editor of Global Fixed Income Strategy at BCA Research Inc., an independent investment research firm based in Montreal. “Investors are looking to hide their money somewhere where at least they’ll still get most of it back.â€
Market watchers said the main participants in the auction – commercial and investment banks, primarily in Europe – use short-term government debt more as a means to manage their cash and maintain liquidity than as an income-generating investment. As a result, they said, the yield plays a minor role, next to the predominant concern of having their funds secure and readily available.
Ms. Puffer added that for European banks, the German T-bills can be used as collateral for borrowing from the European Central Bank – thus allowing them to put their cash holdings to work to generate additional liquidity. This makes the T-bills particularly attractive – even at negative yields – for banks trying to keep money flowing amid an ever-tightening European credit environment.
Experts also point out that negative yields aren’t new territory for the bond market. In “real†terms – once inflation is taken into account – many safe-haven government issues have long been in negative territory.
“Nominal returns are a fiction. The return that matters is the real return, i.e. the purchasing power of your money,†said Eric Lascelles, chief economist at RBC Global Asset Management. “By this standard, even a German 10-year bond offers a negative return.
“The Rubicon was crossed long ago.†And so it is in a world of negative yields.