Europeans are seeking safety in the same manner in which investors in the United States sought safety during times after the stock market crash.  Imagine selling a bond issuance at a negative yield.  Germany, by far the strongest rated of the large Euro nations under pressure, sold 6-month bills at a negative interest rate.  NEGATIVE RATES!!! 

The average yield is -0.0122%, down from a whopping 0.001% previously. We would be watching PowerShares DB German Bund ETN (NYSE: BUNL) and PIMCO Germany Bond Index ETF (NYSE: BUND) in reaction.  There is also the parabolic PowerShares DB 3x German Bund ETN (BUNT) as well, but there may be much different tracking issues on a leveraged exchange traded product that has different trading hours than the market it tracks. 

At issue is not whether or not this persists forever, because it cannot be the case.  It is unfathomable if not mathematically impossible.  More important is what the implication is for overnight and money market funds.  In the U.S., these are supposed to trade “at the buck” and that implies that the value is always $1.00 per share no matter what and that interest is paid out.  The firm hosting the fund has to have a management fee of some sort as well.

When negative rates are paid out it implies that the money market funds are paying out a negative yield and that implies that the funds are “breaking the buck.”

Again, this cannot go on indefinitely but it can create new previously uncharted problems in the near-term.  It is not exactly as if the European banks and fund management families are going to want to pay up the difference to keep the fund values at the equivalent of 1.00 in Europe.

No wonder the Euro has lost so much against the Dollar.  At least the German investors can get about 0.1% in America.

JON C. OGG

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