Hungry Sovereigns

Investors Bond With Germany

The German federal eagle, the symbol at the German finance agency that issues federal bonds, is showing its strength.
  • Why it matters

    Why it matters

    Historically low bonds leave the government with more spending money because it has to pay less interest, but some investors fear the whole market could eventually blow up in their faces.

  • Facts


    • Investors are paying negative interest rates for German bonds of maturity up to nine years.
    • The yield on a ten-year German “bund” hit a record low of 0.07 percent on Thursday.
    • A survey found that 84 percent of fund managers believe the bond market is overvalued.
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Paying the government to borrow money? For many investors, it’s becoming a frighteningly common phenomenon.

Nick Hayes, a fund manager at Axa Investment Managers, is one who is having doubts about what is going on. For a long time he had resisted calling the surge in bond prices and corresponding plunge in yields an exaggeration.

But now, with governments worldwide offering more than $2 trillion (€1.8 trillion) worth of bonds to investors at negative interest – meaning investors have to pay for the privilege to lend their money – and about 80 percent of that from the 19-nation euro currency zone, it’s all become a bit too much for Mr. Hayes.

“The calm with which investors are accepting negative yields is concerning,” Mr. Hayes told Handelsblatt.

He’s far from the only one. According to a recent survey from Bank of America/Merrill Lynch, 84 percent of 180 fund managers believe the global bond market is currently overvalued.

Such pessimism is hardly surprising. Yields on bonds can only be found if you look with a magnifying glass these days. This is true above all for Europe, and especially so for Germany, its largest economy.

It’s a development that has the German government, which is saving hundreds of billions of euros in lower interest payments, jumping for joy.

“Investors should ask themselves whether they feel comfortable with the overall risks in bond markets.”

MFS Investment Managers

People entrusting their money to Berlin are not only failing to make a profit, they even have to pay for the priviledge in many cases. On Tuesday, the negative interest rate on a five-year bond was 0.15 percent. That means for every €10,000 ($10,810) lent to the government, creditors lose €15 per year.

For shorter-running government bonds, the losses are even higher. Only when savers lend Germany money for 10 years or more will they get back minimally more than they had originally invested.

Even here, yields are fast nearing negative territory. On Thursday the yield on a ten-year bond fell to just 0.07 percent annually, though it had recovered again slightly to 0.08 percent by Friday.

Even for a 30-year bond, creditors buying in on Thursday would have received less than 0.5 percent interest per year – another historic low.

This is almost certainly not going to be the end of it. Analysts at Britain’s Royal Bank of Scotland predict the yield on ten-year German bonds could fall as far as  minus 0.13 percent. That prospect is part of the reason investors are still investing: If they buy bonds now, they can still expect to sell them on for a profit at a later date.

Germany’s Finance Minister Wolfgang Schäuble should be over the moon by the investor appetite. The country has never paid less interest than it currently does on its existing loans, and it costs Mr. Schäuble close to nothing at the moment to take on new debt.

Over the next 21 months, Germany is due to pay back government bonds totaling around €270 billion. The yearly interest costs on these bonds amounts to €5 billion.

If Mr. Schäuble would have borrowed the €270 billion, with the same maturities at the market rates seen on Tuesday, he would not only cut the €5 billion bill in interest payments but even make a profit of €200 million according to calculations from Die Zeit.

The reason for these extraordinary developments on bond markets has been the European Central Bank. Since June of last year, the ECB has been charging banks that deposit extra cash with the central bank, thereby hoping to push banks to invest their money instead of keeping the cash.

The so-called deposit rate currently stands at  minus 0.2 percent and marks the natural floor for rates. In other words, even if a bank has to pay the German government 0.15 percent for a five-year bond, it’s still better than parking their money with the ECB.

The ECB has stepped on the bond pedal even further this year, in March launching a plan to buy as much as €1.14 trillion in assets, mostly sovereign bonds, to further push down bond yields. Its reasons are simple: The bank hopes more people will borrow money, and thereby revive a stagnant European economy.

Bond yields have fallen not just in Germany but across the whole Europe as a result, with the exception of crisis-plagued Greece.

The dynamic is forcing investors to take greater risks by buying bonds at longer and longer maturities, meaning that they are committing their loans to governments for longer periods of time, all just to earn a bit of interest. This is, of course, exactly what the ECB wants: “Investors are being pushed into riskier investments,” said Tilmann Galler, a capital markets strategists fof JP Morgan Asset Management.

Investing in longer durations can entail huge risks for investors, and is why many fear that a bubble may soon blow up in their faces. The reason is that bonds of longer ‘duration,’ in the jargon, are more sensitive to changes in interest rates or market moods.

In other words, the value of bonds falls more dramatically at longer maturities if the yield earned on those bonds suddenly rises. This matters for investors, who usually hope to sell a bond to another buyer before it has reached maturity.

“Investors should therefore ask themselves whether they feel comfortable with the overall risks in bond markets,” read a report from strategists at MFS Investment Managers.

The German government, by contrast, could hardly care whether investors end up losing their shirts or not. The low-interest rate era may not last forever, but the bonds it has issued during this time will preserve their advantage for years to come.

Financial researcher Jens Boysen-Hogrefe of the Kiel-based Institute for the World Economy has compared the interest burden from bonds issued post-crisis – between 2009 and 2014 – with the average pre-crisis interest levels from 1999 to 2008. He calculated that the German government will save a total of €160 billion in interest payments until 2030.

While state and local governments are benefiting from the lower interest burden, Germany’s notorious savers are the ones having to foot the bill. According to a DZ Bank study, investors have lost more than €190 billion in interest between 2010 and 2014 — €57.9 billion of it last year.

The situation is even more extreme in Switzerland. The country last week issued the first ever ten-year government bond with negative interest. Investors bought €362 million of the bonds at a rate of minus 0.055 percent – probably because they expect yields to drop even further and they therefore hope to sell the debt at a profit.

Even crisis-ridden Spain can now borrow money at no cost. Last week, Madrid managed to issue a six-year government bond to investors with a minus 0.002 percent interest rate.

Instead of going for federal bonds, some investors might want to look more locally.

More profit can be found by investing in new city bonds issued by six Ruhr Valley cities in Germany. Bochum, Essen, Herne, Remscheid, Solingen and Wuppertal – all communities not exactly known for their sound finances – have raised €500 million with the debt security. “Our bond is just as secure as a government bond, but it yields higher profits,” Manfred Busch, treasurer of Bochum, told Die Zeit.

Demand has exceeded supply, which is why the ten-year bond that was issued at an interest rate of 1.125 percent per year is now yielding an interest rate of just 0.96 percent on the open market. In other words, investors are willing to accept lower yields to get their hands on the securities.

The low figures have boosted interest in Germany’s blue-chip stock index, the DAX, as many investors have turned to the stock market for salvation. But Germans are generally share-skeptical. Bonds might still be the way to go for a while yet.

Versions of this story appeared in the German weekly Die Zeit and in Handelsblatt. Andrea Cünnen covers financial markets for Handelsblatt in Frankfurt, while Claus Hecking and Jens Tönnesmann are correspondents for Die Zeit. Christopher Cermak of the Handelsblatt Global Edition contributed to this story. To contact the authors:, and       

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