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Bond Sell-Off Surprises Investors

German government bonds, contrary to expectation, are beginning to yield more than many investors had anticipated.
  • Why it matters

    Why it matters

    • Bond and stock prices have been fluctuating massively in the last two months. It’s a tough atmosphere for investors and could make borrowing for cash-strapped governments more expensive again.
  • Facts


    • In April, the 10-year German bond yield slipped to a historic low of less than 0.05 percent. On Wednesday, it rose above 1 percent.
    • In the United States, 10-year Treasuries are currently yielding 2.5 percent.
    • Germany’s blue-chip DAX index has dropped by more 10 percent since reaching an all-time high of 12,391 points in mid-April.
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Sounds like an ad for a car commercial: From zero to 100 in only eight weeks!

In this case, it refers to the yield investors can obtain on a 10-year German bond, which on Wednesday cracked the one-percent mark for the first time since September 2014, and on Thursday morning was still offering 1.02 percent.

As recently as April, the 10-year German bond yield had slipped to a historic low of less than 0.05 percent and was heading fast toward offering investors absolutely no interest at all.

It’s a development that has baffled many investors, who were caught off-guard by the sudden shift in sentiment over such a short period of time. The bonds of Germany’s largest economy, considered about the safest thing that investors can own in uncertain economic times, has long been in high demand by investors across the globe.

Before the last eight weeks, analysts and experts had long expected the yield on 10-year German bonds to even drop below zero – meaning investors were willing to actually pay a small bit of “negative interest” to hold government bonds.

But instead of the diving head-first into a negative interest economy, a sell-off is now the order of the day in the government bond market. On Wednesday, many investors sold their government bonds in Germany and across much of Europe, causing yields for those bonds to surge.

“The search for fundamental influencing factors was as difficult then as it is now.”

Jens Kramer and Bernd Krampen, NordLB

In the past month, the yield on French 10-year bonds has climbed 45 points to 1.35 percent. Italian and Spanish debt have climbed more than 50 points to 2.3 percent and 2.28 percent respectively.

It’s a similar story even in the United States, the world’s largest economy, where 10-year Treasuries are now yielding 2.5 percent again.

Pimco, the world’s largest bond investor owned by Germany’s Allianz, quietly sold a large chunk of its U.S. treasury holdings prior to the latest selloff. The share of U.S. bonds in its flagship Total Return Fund declined from 23.4 percent in April to just 8.5 percent in May, the fund announced this week.

The stock market isn’t immune to the turbulence, either.

After reaching an all-time high of 12,391 points in mid-April, Germany’s blue-chip DAX index has lost more than 10 percent of its value, at times slipping below the 11,000-point threshold. It recovered a little on Wednesday, reaching about 11,175 points by the afternoon.

Analysts are wracking their brains trying to find plausible explanations for the roller-coaster ride in the markets.

When prices first began fluctuating in April, many analysts quoted the terse words of prominent investors like Bill Gross and Jeffrey Gundlach, who had a very public change of heart and urged people to start selling bonds.

The ECB drove up the price of securities to higher and higher levels through their massive €1.1 trillion bond-buying program launched in March.

“But the search for fundamental influencing factors was as difficult then as it is now,” German bank NordLB analysts Jens Kramer and Bernd Krampen wrote in a research note.

Nevertheless, most experts have been quick to identify at least one possible cause: central banks.

In Europe, whether you buy or sell bonds depends on how much you trust the European Central Bank to follow through on its policies.

The Frankfurt-based ECB drove up the price of securities to higher and higher levels through their massive €1.1 trillion bond-buying program launched in March.

But with recent economic data from the euro zone sounding more promising again, there is growing speculation that the ECB could scale back its liquidity injections earlier than planned.

Just last week, Europe’s statistical agency said inflation in the 19-nation euro zone had risen 0.3 percent in May. That’s up from 0.0 percent in April and negative 0.6 percent in February.

This kind of news might be good for the European economy but it hasn’t been very good for bond and stock prices. Investors fear the “good news” will prompt the central bank to turn off the money spigot. ECB President Mario Draghi didn’t help last week when he said the central bank had no plans to counter that sentiment with additional purchases.

But many experts find that explanation unconvincing, and are still betting on a rebound in the coming year. Whether or not the ECB will step up its purchases further, it seems clear they will stick to their current plan to continue buying bonds until at least September 2016.

“The argument that inflation rates in the euro zone, which have risen above zero again, could be responsible for a rise in yields at the long end of the federal bond curve seems somewhat cumbersome,” said Mr. Kramer and Mr. Krampen of DZ Bank. Nor do the experts feel that that uncertainty over the Greek debt dispute should be causing yields in safe economies like Germany to rise.


bundestag_ IMAGO
Going forward, it will be more expensive for the government to borrow money. Source: IMAGO


That lack of a solid explanation is why investors can expect a rocky up-and-down ride over the coming weeks and months.

Nor can savers in Germany or elsewhere expect to benefit quickly from the sudden rise in the interest rates of bonds. Experts note that, even if bond yields are rising, most banks orient themselves to the ECB’s benchmark interest rate when they decide how much interest to offer their customers.

“A trend reversal in interest rates hasn’t yet taken place, and attractive deposit rates are therefore still nowhere in sight,” Martin Faust, a banking professor at Frankfurt’s School of Finance, told Handelsblatt. “The deciding variable for short-term savings deposits is the benchmark rate of the European Central Bank.”

Rather than a new trend, many experts believe the fluctuations in the markets are likely to remain significant for a while. This goes for Europe as well as for the United States, where some market bets that the Federal Reserve might raise interest rates quicker than expected has also wreaked havoc with investors’ portfolios.


bond story_rates on the rise


“Central banks are forcing investors, who are judged by short-term performance goals, in one direction through their aggressive policy. This creates the recurring threat of turbulence,” said Ralf Zimmermann, equities strategy director at Germany’s Bankhaus Lampe.

For this reason, Mr. Zimmerman said he expects the DAX stock index to continue swinging “between 10,500 and 12,500 points in the second half of the year.”

More trouble could also be in store for the bond markets, too. Even after the latest increase in rates, experts note that most federal bonds still are not exactly producing high yields – even 1 percent is still low compared to historical averages.

Johannes Müller, and investment expert with Deutsche Asset & Wealth Management, noted that investors who bought bonds in 2000 would have doubled their money by 2014. If they invested the same amount today, they’d have to wait 85 years for the same result.


Susanne Schier covers markets and investors for Handelsblatt in Frankfurt. Jessica Schwarzer is Handelsblat’s chief stock market correspondent. Frank Wiebe, Katharina Schneider and Christopher Cermak also contributed to this story. To contact the authors: and

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