FRANKFURT: Investors on Tuesday started paying for the privilege of owning rock-solid German government bonds as fears of a possible Brexit and economic worries caused a rush to the safety of German debt.
Strong demand for German sovereign bonds, known as “Bunds”, caused prices to peak, in turn pushing their yields into negative territory for the first time ever.
In the face of heightened political and economic uncertainty, investors flock to safe havens to park their cash and German government 10-year bonds are considered a benchmark of financial security.
In late morning European trading Tuesday, the Bund yielded minus 0.028 per cent, an immediate cost to anyone holding the investment.
Ditching any hope of a return on their investment now seems a reasonable price to pay to escape the uncertainties of falling stock markets or volatile commodities and currencies.
The 10-year German government bond is regarded as one of the safest investments and among the factors driving the current rally in Bund prices are concerns about the global economy, rock-bottom inflation expectations in the single currency area and fears about a possible “Brexit” with the British referendum on EU membership just 10 days away, traders said.
“A huge driving factor between the current price trend is the heightened uncertainty over a possible Brexit, which is driving investors into the safe haven of German sovereign bonds,” said DeKaBank economist Ulrich Kater.
Interest rates on sovereign debt have been low for some time as central banks snap up government bonds from investors in an effort to boost economic growth through increased liquidity.
Be it in Japan, the United States, Switzerland or Britain, the rate of return for sovereign bonds of most major industrialised nations are striking new record lows in day-to-day trading.
“The drop in yields below the zero mark once again shows the immense challenges currently facing global financial markets,” Kater said.
“Weak growth is pulling down inflation expectations even further. Central banks are trying to counter falling inflation expectations using aggressive monetary policy,” he said.
The European Central Bank has slashed its key interest rates to zero and launched a massive bond-buying programme known as quantitative easing (QE) in a bid to get the eurozone economy back on its feet and push inflation higher.
“Fears that Britain will quit the EU has killed off any willingness to take risks in European capital markets,” said LBBW analyst Werner Bader.
Commerzbank economist Rainer Guntermann agreed.
“Risk aversion and scarcity remain the key driving forces for market activities and valuations,” he said.
Published in Dawn, June 15th, 2016
