Zero Bund Yields No Deterrent to Euro

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.

“If you buy German assets denominated in euros today, you could find yourself holding an asset in a superior currency in a breakup scenario,” said Jamie Stuttard, who helps oversee $1.6 trillion as head of international bonds at Fidelity Management and Research Co. in London. “There isn’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.”

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

“The currency trade is the main driver of low yields, not only in Germany but also in Switzerland, France, Austria, the Netherlands and Belgium,” said Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG in Zurich. The debt problem of peripheral countries “is the strength of Germany, Austria and France. Without this weakness, the stronger countries would never pay such low yields.”

Belgium’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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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell