Why does Germany have such negative bond yields?

by Shaun Richards

Much is happening in the economy of Germany right now and let me open with a perspective provided by when we looked at it on the 6th of June.

If we look towards Europe we see that the Federal Republic of Germany has set a new record for itself this morning as its benchmark ten-year bond yield has fallen to -0.23%. So it is being paid ever more to borrow which I will let sink in for a moment.

At the time that provided some shock value as in the previous wave of negative bond yields we had seen the shorter maturities go negative but this time the benchmark ten-year had joined the party. However the bond market surge continued and as I type this the German ten-year yield is -0.4%. There are various factors in this but the German statistics office has provided a significant one already today.

The debt owed by the overall public budget  to the non-public sector  amounted to 1,916.6 billion euros at the end of 2018. This represents a per capita debt of 23,124 euros in Germany. Based on final results, the Federal Statistical Office (Destatis) also reports that debt decreased by 2.7% (52.5 billion euros) compared with the revised results as at 31 December 2017.

This provides a perspective on the French debt numbers we looked at yesterday and whilst the basis is slightly different the broad picture holds. In fact the two countries are heading in different directions as this from back in April highlights.

According to provisional results of quarterly cash statistics, the core and extra budgets of the overall public budget – as defined in public finance statistics – recorded a financial surplus of 53.6 billion euros in 2018.

In fact looking at the annual data release Germany has been reducing its debt since 2015.

The next factor is the expected policy of the European Central Bank which already holds some 517 billion of German bonds or bunds and is expected to announce new purchases in September. The impact on the German bond market is higher because the ECB makes its purchases according to a Capital Key based on economic performance.

Five-yearly adjustment based on population and GDP data from European Commission.

Here Germany is strong getting 26.4% of the total and hence the QE bond purchases. But its bond market is relatively small due to the way it runs its public finances and according to its statisticians it has a securities debt ( bonds and treasury bills) of 1.521 trillion Euros and falling. In fact as the ECB has been buying the debt total has fallen by 51 billion Euros. If you want the price of something to rise then large purchases ( ECB) accompanied by falling and at times negative supply is the way to do it.

This creates quite a mess because you have a negative yield and thus an expected loss if you hold to maturity. Yet holders of German bonds have made large capital gains as for example the German bond future is up over 3 points since we looked at it on June 6th. Of course you are replacing guaranteed coupons with the “greater fool” theory but then that twists as we note the greater fool is often the central bank.

The Economy

This morning has brought more evidence of a slowing economy.

Compared with June 2018, the number of persons in employment increased by 0.9% (+394,000). The year-on-year change rate had been 1.2% in December 2018, 1.1% in January 2019 and 1.0% in April. This means that employment growth slightly slowed in the course of 2019.

As you can see employment growth is slowing and June saw a rise of a mere 1,000 on a monthly basis which if adjusted for seasonality rises to 7,000 as opposed to the 44,000 average of the last five years.

If we switch to unemployment Reuters is reporting this.

German unemployment increased less than expected in July, data showed on Wednesday, suggesting that the labor market in Europe’s largest economy so far remains relatively immune to an economic downturn which is driven by a manufacturing crisis. Data from the Federal Labour Office showed the number of people out of work rose by 1,000 to 2.283 million in seasonally adjusted terms. That compared with the Reuters consensus forecast for a rise of 2,000.

I love the way that Reuters think you can accurately forecast unemployment to 1000! The broad view is that on this measure the decline in unemployment looks as if it may have stopped. This is backed up by this bit.

The jobless rate held steady at 5.0% – slightly above the record-low of 4.9% reached earlier this year.

If we switch to retail sales then the story starts well.

+3.5% on the previous month (in real terms, calendar and seasonally adjusted, provisional)

That was the best since 2001 on a monthly basis but then we also got this.

-1.6% on the same month a year earlier (in real terms, provisional)

This was partly driven by a large downwards revision to the May data which reminds us of how erratic retail sales numbers can be. Anyway so far this year the retail numbers have been helping to keep Germany going.

Compared with the previous year, turnover in retail trade was in the first six months of 2019 in real terms 2.2% and in nominal terms 2.9% higher than in the corresponding period of the previous year.

But if yesterday’s survey is any guide the times they are a-changing.

The GfK consumer sentiment indicator, based on a survey of about 2,000 Germans, edged down to 9.7 from 9.8 a month earlier. It was the lowest reading since April 2017 and in line with market expectations……….The GfK sub-indicator measuring consumers’ economic expectations dropped to -3.7, falling below its average of zero points for the first time since March 2016 and hitting the lowest level since November 2015. ( Reuters )

Economic Growth

This morning has brought the economic growth numbers for the Euro area.

Seasonally adjusted GDP rose by 0.2% in both the euro area (EA19) and the EU28 during the second quarter of
2019, compared with the previous quarter…….Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.1% in the euro area and
by 1.3% in the EU28 in the second quarter of 2019. In the previous quarter, GDP had grown by 1.2% in the euro
area and by 1.6% in the EU28.

We do not have the German numbers but there are more than a few clues from this. For example we looked at France ( 0.2%) yesterday and we know Austria was 0.4% and Spain 0.5%. By the time you read this you will know how much Italy contributed to the reduction in growth at which point we will know if the Bundesbank was right to suggest that the German economy may have contracted this quarter.

Comment

What we are seeing is the economic and financial market version of a perfect storm. A large buyer enters a market just as supply reduces and then net supply goes into reverse. Next we see an economic slow down which surprisingly at these levels retains the old knee-jerk effect of people buying bonds. However this time around that is not driven by the security of coupons as some bonds now don’t have them or yield because it is usually negative but instead the prospect of being able to sell at ever higher prices to the central bank. So it looks the same on the surface but is different as we look deeper.

Meanwhile we do not often get comparisons of this sort so here it is and as it is missing the UK is the same as France,

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