Guest Commentary: Germany’s Negative Yields – Another Reflection of Distrust in Periphery
For the first time, Germany’s bond auction yielded negative yields. Its 6 month bond auction resulted in 3.9 billion euros in fresh funds, with a yield of -0.012%.
This means that investors are willing to take a loss in order to hold on to the precious German papers. This emphasizes the loss of trust in peripheral countries, despite all the efforts.
Italian bond yields remain very high and cannot really let go from the 7% level. The trouble at Unicredit is just exacerbating the situation. Every Italian recycling of debt results in a higher servicing cost for the euro-zone’s third largest economy.
The negative yield also shows that the bond rout that engulfed strong countries is now behind us. The Netherlands, Finland and Austria were among countries affected by a growing distrust. This wave eventually reached Germany, in widely uncovered bond auction.
But now, demand was high enough.
German chancellor Angela Merkel insisted that no country should leave the euro-zone. This bond auction might also show that investors do believe that some peripheral countries will leave the euro-zone, leaving it to the stronger countries, with Germany being the safest and strongest.
Merkel and French president Sarkozy focused on the long term goal of getting everyone’s fiscal houses in order. The idea is that more balanced budgets will result in more trust and more stability.
Reality is different, especially for Greece: an intense effort to reduce spending and balance the budgets resulted in a deeper recession, lower tax revenue and eventually a higher deficit.
Greece’s membership is quite shaky, and will become shakier as it needs to redeem a big bulk of bonds at the end of March.
By Yohay Elam, Forex Crunch
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