Germany’s Longest Bond Goes Negative for First Time

Investors spooked by a revival of trade tensions piled into safe assets on Friday, pushing 30-year German government yields into negative territory for the first time.

The move meant that at one point on Friday effectively all of Germany’s debt—considered the safest in Europe—would require investors to lose money on any bond bought and held to maturity. It reflects deep pessimism about the ability of the economy to generate growth over the coming decades and the expectations of more extreme monetary policy to come.

A rate for 30-year German bonds dipped briefly into negative territory, touching minus 0.002%, according to Tullett Prebon, while 10-year and 20-year bonds also touched record lows during the morning. Yields fall when bond prices rise.

Yields elsewhere also fell, with U.S. 10-year yields down to 1.866% by late afternoon in Europe and the U.S. 30-year yield down at 2.405%.

Markets were jolted when President Trump on Thursday threatened to put tariffs on essentially all Chinese imports, ratcheting up tensions in the trade conflict between Washington and Beijing.

Europe’s economy is caught in the middle. Germany’s export-dependent companies are weakened by falling demand from manufacturers in China, whose economy is also slowing.

Investors were already positioning for a fresh round of interest rate cuts and more bond buying, or quantitative easing, from the European Central Bank, which is trying to stoke an inflation rate that has been persistently below target.

Jens Peter Sorensen, chief analyst at Denmark’s

Danske Bank
,

said the squeeze on yields was due to investors scrambling to find anything that produced positive income. “It’s tricky to predict what the floor for the German bund yields is at this point,” he said. “One thing is certain, though: Unless we suddenly get clarity on the U.S.-China tension and Brexit, and see some fiscal spending by countries in the eurozone, this will continue for quite some time.”

Negative rates in theory mean the German government can borrow money from investors and get paid for doing so. But Berlin runs a budget surplus and has no desire to increase spending as other slower-growing European countries would like it to do. Olaf Scholz, Germany’s finance minister, has said recently the government doesn’t need to act as if it is in a crisis.

German Chancellor Angela Merkel after a speech in Dresden on July 15.


Photo:

jens schlueter/Shutterstock

Many in Germany don’t like the ECB’s ultra-low interest rate policies because they worry these hurt savers, undermine insurance companies and banks and discourage more indebted countries from pursuing economic reforms. Germany’s central bank, the Bundesbank, does support the ECB’s QE program, calling it an effective monetary policy tool.

Another factor weighing on bond yields is a scarcity of supply, which is why the expectation of increased demand from another round of ECB bond buying has such a powerful effect. Germany’s federal government has about €125 billion ($138 billion) of outstanding tradable debt with maturities of more than 20 years, according to Bundesbank data. The U.S. in contrast has about $1.8 trillion of tradable debt with maturities greater than 20 years.

“It is certainly not going to end here,” said Jan von Gerich, chief analyst atNordea Bank in Finland. He highlighted the weakening European growth outlook, underscored by a poor set of manufacturing survey data for July from France, Germany, Italy and Spain, as well as rising global political uncertainties and investors’ desperate hunt for yield.

“Yields will remain very low in the euro area for a long time, especially now that the U.S. rate cycle has also turned.”

Even before this week’s leg down in yields, nearly a quarter of all global bonds outstanding—government and corporate—sported negative yields, up from 16% at the beginning of the year, according to Bank of America Merrill Lynch.

In some ways, German yields are catching up with Switzerland, whose 30-year bonds first went negative in the summer of 2016. The Swiss 30-year yield has been negative for most of July and hit a record low of minus 0.302% Friday, according to Tradeweb.

Swiss yields are lower in part because the country’s interest rates are lower: Already at minus 0.75% versus minus 0.4% for the eurozone. But if the ECB cuts its rates further as expected, Switzerland is likely to follow, according to analysts, likely pushing its debt yields even more deeply negative.

A German bond due to mature in August 2048, the closest bond outstanding to a 30-year rate, traded with a yield as low as minus 0.004% on Friday, according to Tradeweb, before recovering to be back in positive territory late on Friday. The German 25-year bond, which has been consistently in negative territory for the past week, was at minus 0.067%.

Other European government bond yields have also been squeezed: French government debt has negative yields out to 10 years, while Dutch bonds are negative out to 20 years.

Write to Paul J. Davies at paul.davies@wsj.com and Patricia Kowsmann at patricia.kowsmann@wsj.com

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