As German bonds offer little positive yields, they may soon sink into the negative yielding territory and this poses a major threat to the market.
Germany’s 30 year yields are on the brink of moving into the negative territory, a turn of events that would be the first among all the major bond markets. The fate of the bonds hangs precariously in the hands of an already volatile market. In the position they are in, it would not take much to send the German bonds into the negative. Growth in political risk in Italy or further deterioration of trade relations between the United States and China, for example, would further erode the bonds and push them into negative territory.
Of the 57 conventional securities in the German market, only six are still offering some sort of positive yields. This shows just how much the bonds have deteriorated. All of the 6 that are still offering some positive yields are due for maturity in no less than 20 years. Germany’s 30 year yields are currently providing a yield of 0.25%. This number is the lowest ever recorded for 30 year yields. For comparison purposes, Italy’s 30 year yields are providing over 3% yield and the United States’ are providing sitting around the 2.5% mark. This shows just how small the German yields have become and the closer they are to the zero marks, the sooner they will fall into negative territory.
What does it mean for the market?
If the German bonds fall into the negative yields territory, it will have a major impact across the board. Bodies that require high credit ratings to function may be forced to buy negative yielding bonds for them to remain in business. Pension funds and insurers are examples of such bodies that may have to trade in negative yielding bonds.
Other traders may be forced to move into other markets in a bid to find positive yielding bonds to trade with. Risky markets such as Italy’s may become one of the few options for traders seeking positive yielding bonds. This will also mean there will be fewer traders chasing after German bonds and this will come with its own adverse effects.
The country itself might be forced to increase its fiscal expenditure if the bonds go into negative territory. This might pose its own problems with the European Central Bank (ECB) which has been, in recent times, seeking to tighten the regulations around fiscal spending. The bank has been vocal about preventing countries from overspending in its fiscal expenditure and if Germany has to increase its expenditure, there might be friction between the nation and the ECB.
The leaning of German bonds towards the negative territory may have serious effects on the country’s economy. The effects of it will be felt across Europe’s economies and there might develop a need to turn to drastic measures to mitigate rate effects that will come with negative yielding bonds.