German Bond Yields Turn Negative… Under Zero-Percent Returns?

You might think that record low bond yields in the U.S. and in Europe’s safer nations would have a floor of zero percent.  Afterall, you cannot have a negative bond yield.  Or can you?  Reports were out earlier this year that a Treasury TIPS auction, the bonds and notes that adjust with inflation through time, managed to go off with a yield of just under zero percent.  Now we have seen that German bund (bond) yields went under the zero-point-zero mark.

It is a scary world when interest rates go negative.  Imagine going to a borrower and saying “Here take my money and as long as you are willing to hold it I will accept slightly less than the face amount without any interest at maturity.”  That is where we are now.

Bill Gross just warned of this yesterday in his June 2012 outlook that investors are not getting enough yield for the risk they are taking.  If this does not ring true here, what does.   German government bond yields went to record lows on Friday.  The yield on the two-year notes hit -0.001% at one point on Friday, and the 10-Year note went to 1.1641%.  This is the European flight to safety in maximum overdrive.  Investors are getting more and more concerned that Spain will not be able to shore up its banks because of all their troubled housing loans, and concerns are present every single morning that Greece is going to leave the Euro and also that Italy is just “too big to bail.”

Bloomberg shows the current two-year yield with a zero-percent coupon actually offering a 0.01% yield, so perhaps these negative bond yields are just aberrations you see during extreme periods.  Still, it is nearly impossible to find any investors who actually believe that the Eurozone issues are going to find an instant and sudden end.

JON C. OGG