Why does Germany have such negative bond yields?

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.


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,




16 thoughts on “Why does Germany have such negative bond yields?

    • Hi Purpleline

      They will be applying ILO definitions to the 3.1% unemployment rate. The only fudge I can think of is not counting the new migrants in the labour force. That would be analogous to a declining participation rate.

  1. Hello Shaun,

    I guess that the market is pricing in uncertainty with other bonds, best to get in the deal now…..


    • Hi Forbin

      That does seem to be at play and continued today with the ten-year yield falling further to -0.44%. The purist view comes from Switzerland which has the added bonus of its own currency meaning that even the 30 year is at -0.16%. So Germany would also have a yield curve entirely negative if it retained the Dm, but the catch is that the Dm would have soared against a rump Euro.

  2. The bond rate machinations of the E.U (we pronounce it aye! you!!) could be politely called “constructive fabrications”- con-fab. It will be paid for by pensioners (or the state?/taxpayers). Many pension plans are forced to buy bonds; retirement accounts ultimately transcended to “dreck” rate annuities. But it’s a happy bond world today-the circus has arrived- the champagne is being chilled. And two versions of “Yellow Brick Road” are on the screen monitor – Wizard of Oz/ Elton John- (I have the “merry munchkins” singing and dancing version).

    P.S: My Canadian registered retirement savings plan must be turned into an annuity like instrument when I become 72 (age not I.Q.). I will tax appropriately loot it before then.

    “Light relief-focussed anger-action plan”

    • Hi Canuckistinian

      Some pension funds I think have bought even more bonds to allow for the lower yields which of course have driven the yields even lower. That is part of how bubbles are created and I wonder from time to time how this period will be looked back on.

      72 seems an odd age to choose but I suppose no more odd than the 75 of the UK. We have alternatives to annuities now, have they also appeared in Canada?

  3. Off topic, but I am always surprised to see Italy makes 50% more stuff than either France or UK.
    When German energy prices really start to rocket and imports cannot provide cover for when the wind don’t blow and the sun don’t shine, the SHTF. Bonds doubling in value? Don’t think so. Mercantile meets ‘green blob’. Shame, arrogant b’stards.

    • ” wind don’t blow and the sun don’t shine”

      well just like us they will buy French Nuclear electricity or Hydro from the Scandinavian countries , the HVAC are being built or are built

      Now , God help us and them ( and other countries ) when we all want the electricity !

      yah, I guess their coal fired stations will save their day , like it does now. Good job we’re good little boys and girls and are closing ours……

      When the lights go out we’ll see , won’t we ? eeheheheheh


      PS: will need more popcorn ….to cope with the down ticks 😉

      • Forbin, the French are going to close some of their nukes, the Dutch their gas, the Scandis have only so much hydro. Everyone thinks they can import when the wind/solar don’t work , but european weather is pretty consistent. Its a stupid stupid policy doomed to fail. The lights will be going out across the continent.

    • Hi Hotairmail and thanks for the link.

      The problem is that the German constitutional court has proved to be something of a paper tiger. In fact it has been worse than that because by the time it makes a decision on something it is already too late as the programmes such as QE are usually well under way by then.

  4. I see that Switzerland is now going to charge it’s wealthy ( 2mil SW ) depositors 0.75% to hold their money. No doubt many other countries will be watching this closely and no doubt the definition of ‘wealthy’ will start to slide to include more depositors. This is getting absurd! Coming to a high st bank near you?

    • “Coming to a high st bank near you?”

      yes indeed I think they’ll try it , along with devaluing e-money and other despicable tricks – they will be protected of course….


      PS: oh banning cash too, crooks use cash . never thought I’d see the day that pocket money was a criminal act ….. coming soon

  5. R.R.I.F or annuity income (set up 71) is fully taxable income (minimum yearly increasing withdrawls that escalate and can trigger other pension problems) rrif 1 year 1.4 per cent to 5 year 2.1+ per cent. Compare to lower dividend tax rate, capital gain tax rates on investments held outside-you control what tax bracket you are in- it’s a no brainer. Dependent on your countries dividend/capital gain tax rates- there are layers of consideration and my advice involves only Canada.

  6. Tax free vehicles have made our thinking lazy in “the art of the game”. With multiple new “vehicles” outside of stocks (forget bonds), you can create any taxable income you desire at the end of the year. It’s “mouldy oldy” math. People can’t think in their heads anymore!

  7. The one overriding reason why German bonds are so negative, is that its economy is protected from a rising exchange rate by the neighbours it has beggared.

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