Investors are willing to own German bunds at zero yields on speculation the currency boost from a euro breakup would compensate for the sacrifice in returns.
â€œIf you buy German assets denominated in euros today, you could find yourself holding an asset in a superior currency in a breakup scenario,â€ said Jamie Stuttard, who helps oversee $1.6 trillion as head of international bonds at Fidelity Management and Research Co. in London. â€œThere isnâ€™t a lot of value in German government bonds at these yield levels, and the single best reason to own German assets is re-denomination risk.â€
The yield on German notes maturing in 2014 dropped below zero on June 1 and has been negative each day since July 6. While European leaders said they are working on a plan to help defuse the debt crisis, traders raised bets on euro disintegration. The implied probability of a country leaving the monetary union by the end of 2014 rose to 66 percent last week from 64 percent a week ago, according to bets on Intrade.com.
â€œThe currency trade is the main driver of low yields, not only in Germany but also in Switzerland, France, Austria, the Netherlands and Belgium,â€ said Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG in Zurich. The debt problem of peripheral countries â€œis the strength of Germany, Austria and France. Without this weakness, the stronger countries would never pay such low yields.â€
Belgiumâ€™s five-year borrowing cost of 1.31 percent is within 20 basis points of the record low reached July 20. Investors earn just 0.15 percent on French two-year notes and 0.5 percent on Dutch securities with similar maturities.
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