Germany sells bonds guaranteed to lose money
Outlook so bleak investors line up to buy bonds with negative yield
The German government managed to sell four billion euros worth of bonds with a negative yield Monday, meaning investors were willing to pay for an asset guaranteed to lose money.
The average yield for six-month German bonds sold by the European Central Bank on Monday was –0.0122 per cent. That means when the bonds come due on July 11, 2012, an investor is guaranteed to get back less than the original sum invested.
"It's more about what's happening elsewhere than what's happening in Germany, but it's certainly a pretty telling development," said Ian Nakamoto, research director at MacDougall, MacDougall & MacTier in Toronto.
'It's hard to put a million dollars under the mattress.'— Ian Nakamoto
Unlike corporate bonds, government treasury bills do not pay interest. Rather, investors typically buy the bonds at a discount, redeem them at face value and pocket the difference as profit. But buyers of Germany's bonds on Monday paid slightly more than the face value of the bond today for the right to redeem them at face value in six months' time.
"Any time they sell debt, it's a test of the market, absolutely," said Richard Pilosof of RP Investment Advisors in Toronto. "It's a test of Europe and it shows the market thinks they haven't created a real solution yet."
The weighted average price was 100.00616 euros to receive 100 euros in six months' time. That's the first time Germany's bond yield has gone negative in the initial auction, though it has dipped below zero in the secondary market from time to time.
Demand for the debt was strong — the cover ratio for the offering was 1.8, meaning there were almost twice as many people wanting to buy the debt as there were bonds up for sale.
"To me, it's more like a safety deposit box than an investment," Nakamoto said. "People go to their bank and pay a fee for the bank to keep their valuables in a safety deposit box. You're not trying to earn interest, you just want to park what you have there and you're willing to pay a fee to have the family jewels protected."
"It's hard to put a million dollars under the mattress," Nakamoto said.
In all, there were offers to buy 7.08 billion euros worth of German debt at the negative yield, but Germany only had four billion for sale.
Germany's previous six-month debt auction on Dec. 5, 2011, had a yield of 0.0005 per cent — microscopic, but still positive.
The strange phenomenon of investors lining up to buy an asset they know will lose money is a testament to how bleak things look in Europe's economy. Even though their money is guaranteed to shrink, investors were willing to pay Germany for the privilege of losing a small amount of money with them rather than possibly losing a lot more by investing in shakier economies elsewhere on the Continent.
Germany's negative yield contrasts with that of other eurozone economies such as Italy and Spain, which are currently paying the highest amount since the early 1990s to borrow money from investors.
"Any time Germany sells, it's less about credit quality and more about supply and demand," Pilosof said. "There's just more buyers than sellers because there's too much cash than can go into [other things] and nobody wants to go into Spain and Italy," he said.
The yield on debt from Switzerland and the Netherlands has previously swung negative, but Germany's economy is much more significant. France, Slovakia, Austria, the Netherlands, Spain and Italy are all scheduled to have bond sales this week.