Bund yields go positive but what does it mean?

Yields on 10-year German bonds passed into positive territory for the first time since May 2019 as surging inflation in the eurozone prompted speculation that monetary policy could be tightened.

AFP looks at what prompted the shift, why it is important and what this spells for the global economy.

– What is the Bund? –

The Bund is the shorthand name for German government bonds — a play on the German word for “federal”.

Like all governments, Germany issues bonds to raise money to pay for its spending.

Bunds are seen as a safe haven for investors to turn to in times of instability, because Europe’s largest economy is considered to be a reliable borrower.

“The quality of the credit is the best in the world”, because it is “without risk” says Patrick Barbe from investment manager Neuberger Berman.

– Why was it negative? –

A bond generates a negative yield when investors are willing to pay more for it than its face value plus the returns it is offering.

Investors are willing to do this in times of great economic uncertainty when they feel other investments may lose value, and central banks buying bonds to stimulate economies also pushes down yields on bonds.

German government bonds entered negative territory in May 2019, as the ECB was rolling out its stimulus programme to ward off the threat of a recession in the the eurozone.

Yields for 10-year German bonds went as low as minus 0.91 percent in March 2020 just as the coronavirus pandemic was taking hold across the continent.

But the indicator, which move inversely to the price paid for the bond, has risen sharply in recent weeks as central banks around the world wind down their stimulus programmes and move towards raising interest rates.

Investors have more optimistic expectations about the economy even as the coronavirus pandemic continues.

After turning positive on Wednesday, yields for the benchmark German bond climbed as high as 0.02 percent, before easing back.

– Why does it matter? –

Rising bond yields mean rising borrowing costs for governments, making it more expensive for them to finance their spending.

The higher yield for German bonds could make them more attractive for investors, potentially changing their strategies and having a knock-on effect in other bond markets.

Investors could be tempted to “pull their capital” out of bonds from more highly indebted countries, such as Italy, putting pressure on their borrowing costs, says Oliver Eichmann from asset manager DWS.

Higher yields could also herald an end to the super low mortgage costs that have helped fuel a housing market boom over the last years.

– What does this mean for the economy? –

Rising Bund yields reflect rising confidence that the eurozone economy will “come out of the crisis without too much damage”, says Ludovic Subran, chief economist at Allianz.

It also shows that investors are placing larger bets on the need for central banks to act to tackle rising inflation.

The European Central Bank, which handles monetary policy in the eurozone, has already announced a stepwise reduction in its stimulus programme.

But higher yields could be a harbinger for a faster tightening of monetary policy.

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