The negative yield on German debt simply means a disastrous confidence in Euro

What does it mean a negative yield on an investment? It sounds crazy. It is better to keep your money in cash or in bank account, than to invest it in assets that will return less than you have invested. So why this happened today with the German bonds? Is the market crazy? Are the investors out of their mind?

No. Certainly no. There is one case when it is good to invest in a loss. It is good to do so if this way you are avoiding a bigger loss.

Negative yield on German bonds means that the bonds are less risky asset than the money itself. Obviously investors think keeping Euro in cash is more risky than holding German debt. But how is this possible if bonds are in Euro and they will be repaid back Euro?

The answer is the doubt in Euro itself. If investors are not sure the Euro will exist, it is risky to keep Euros. In this case holding German bonds is better, as if Euro suddenly disappears or collapses, then the German bonds will be denominated in New Deutsche Marks. And investors will receive back Marks. So investing with a small loss in German debt is an elegant way to guarantee you will have Marks for your Euros, and not Pesetas or Drachmas.

The uncertainty in Euro zone is rising. Spain and Italy are rejecting to make reforms and cut spending. Instead they insist on accelerating the money print from ECB. This makes markets nervous and increases the yields on Spanish and Italian bonds. At the same time Angela Merkel is besieged from other EU governments to stop the austerity and pay more for resolving their problems. Merkel rejects this. So who is to guarantee the Euro in this situation? A group of bankrupted governments, a politically dependent Central bank (ECB), or Merkel alone? Who?

I think the bets are against surviving Euro in this situation. Yes, Merkel can save its currency, as it has a great surplus of market confidence. But she can not save this currency if it is called "Euro". The currency she can save is only a German own currency that is not dependent on risky countries like Spain, Italy and Greece. This possible to save currency is called Deutsche Mark. So obviously much investors think so, as German bonds become a more searched asset than gold.

The negative yield on German debt simply means a disastrous confidence in Euro...

June 1st 2012

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