German Benchmark Bond Yield Briefly Turns Positive for First Time Since 2019

In essence, an investor who buys a German bund at a positive yield and holds it to maturity will be repaid the full amount they paid for the bond, something that hasn’t happened during the long stretch of negative yields. 

Rates globally are being pulled up by U.S. bond yields as investors anticipate faster inflation and more aggressive rate increases from the Federal Reserve. The equivalent U.S. Treasury note yield was at 1.826% after rising steadily in recent weeks. Yields rise when prices for the bonds fall. 

The German bund is commonly considered to be a proxy for Europe’s risk-free rate and is watched as closely as Treasurys in the U.S. The spread, or difference in yields, between 10-year bunds and Treasurys reached 1.86 percentage points.

The European Central Bank has signaled it will cut back on some of its pandemic-era bond purchases, but unlike the Fed, it hasn’t committed to raising its benchmark interest rates, which are set at minus 0.5%. Some in markets think the ECB will eventually have to play catch-up to the Fed given the persistence of high inflation in the region. 

“Bunds have moved in step with Treasurys, yet the ECB is trying to set out a very different path for interest rates than the Fed,” said Sebastian Mackay, a multiasset fund manager at Invesco. “That’s the critical point. They’re claiming that the outlook for inflation in Europe is quite different.”

The ECB began its negative interest rate policy in 2014, driving short-term bond yields below zero, where they remain firmly today. It wasn’t until an economic growth scare in 2016 that longer maturity 10-year yields first tested negative territory. 

The persistence of negative rates reflected the dour outlook for Europe. Many feared that aging populations and sclerotic economies would make it difficult to shake off its slow growth trajectory. 

In addition to negative rates, the ECB has bought trillions of bonds to stimulate growth, yet until recently, inflation remained consistently below its 2% target. 

The inflation story changed last year. Consumer prices in the eurozone surged and annual inflation hit 5% in December, a record high. 

Markets are signaling expectations that the European Central Bank might have to follow the Fed and tighten monetary policy in the coming months to deal with the higher inflation. The overnight index swap market, a proxy for where markets think ECB policy rates are heading, is pricing in two 0.1 percentage point rate increases this year and three to four more increases in 2023. That would mean the end of negative eurozone policy rates by next year.

For asset managers, the German bund’s milestone could still have big implications for how they invest. The pandemic wave of stimulus sent the total amount of negative-yielding government and corporate debt globally above $18 trillion in December 2020. It has nearly halved, falling to $9.3 trillion. 

Negative yielding debt pays back investors less than they put in at the beginning, providing no interest payment cushion in case bond prices fall.

While longer-term yields have turned positive, shorter-term rates, which are more sensitive to central-bank policy, are still negative. That feeds through to negative rates for some bank depositors and in some rare cases such as in Denmark and Portugal, negative rates on mortgages. Banks’ customers are charged to keep money in their accounts in certain cases and borrowers are paid interest by lenders. The topsy-turvy relationship is an incentive to spend.

Positive yields on supersafe government debt mean European investors will now likely buy more bonds at home, which could lower demand in other markets such as Treasurys, according to Iain Stealey, chief investment officer for fixed income at J.P. Morgan Asset Management. This could accelerate the rise in Treasury yields. 

On the flip side, higher yields overall would also mean bond markets attract more capital, as investors seek to lock in lower-risk returns. 

“At 2% on the 10-year Treasury, that does give you a diversification benefit,” protecting investors in the event that stocks or other assets lose value, Mr. Stealey said.  

In the throes of the pandemic, benchmark sovereign debt issued by Western European countries such as France, the Netherlands and Belgium traded with a negative yield. Portugal’s 10-year bond yield also reached below zero, despite its history of financial instability.

When Germany’s benchmark bond yield edged above zero, all 10-year European sovereign bonds temporarily traded with positive yields.

Write to Anna Hirtenstein at [email protected]