FOR THE first time, investors and bankers this week are asking the question: could the euro zone debt crisis spread all the way to Berlin?
Such a scenario, unthinkable not so long ago, would have huge ramifications for global financial markets. It could jeopardise the German bond market’s status as one of the world’s havens, a place of safety for investors wanting to preserve their capital.
The trigger for these fears was a “failed” auction of German government debt on Wednesday, in which the Bundesbank, the country’s central bank, had to step in to buy unwanted Bunds. Demand at these auctions can vary and lacklustre take-up is not uncommon. This time, though, was different. Investors shunned the bonds.
The poor take-up may have been due to the recent rally in the prices of Bunds, which has driven yields to historic lows, making returns less and less attractive.
But there is more. The crisis in Europe has frightened managers of “real money” – not just hedge funds, but pension fund managers and insurers – to the extent that many have been shifting money out of peripheral European debt and are considering exiting Europe altogether. Those concerns have already hit French debt. Germany’s could be next.
If so, then yesterday could have been a turning point. The yield on gilts, benchmark 10-year bonds issued by the UK government, fell below that of Bunds for the first time since 2009. On the face of it, investors are saying that Britain is a “safer” place to put money than Germany.
“At some point, if the politicians do not get their act together, then the euro zone will be uninvestable, and that includes Germany,” says Ralf Preusser of BofA Merrill Lynch.
But it may be too soon to write off Bunds as a haven. Even after a jump in Bund yields of 41 basis points in the past 10 days, German 10-year yields of just over 2 per cent remain historically low – and a long way off the levels of more than 7 per cent on Italian debt. At such levels, Berlin will have little difficulty servicing its debts.
This week’s auction, when demand was the lowest in the euro era and debt managers sold just two-thirds of the targeted amount, could be blamed in part on the auction process itself. The price of German debt, too, may simply have become too rich.
Moreover, say bankers, the German short-term bill market is so robust that yields this week went negative on six-month debt for the first time since the launch of the single currency. Investors, in other words, are paying Germany to lend to them. – (Copyright The Financial Times Limited 2011)
