Why are the rates for German 10 years in negative territory? – Boursorama

The German Bund rose by negative rates for the first time in its history.

The German Bund happened in negative rates for the first time in its history.

It is to believe that the Bloomberg trading screens panicked since Tuesday morning. At 24:20, the German borrowing rate at 10 years was displayed down to -170% -0.017% against 0.023% at the end of Monday’s session.

On equity markets such a change would be impossible: an action can in the worst case lose 100% of its value (company bankruptcy), but never go into negative territory. The phenomenon therefore requires some explanation

How the bond market. Little reminders

On the bond market, investors buy fixed income securities. For example, when the rates are 2% at 10 years, an investor buys for 100 euros a title that will bring him a fixed return (the “Coupon”) of 2 euros (2%) each year for 10 years. The 10 ^th year, the last coupon is paid back along with the amount originally invested (100 euros + 2 euros coupon).

So far, so good.

Meanwhile, the market rates evolve as and time. For example, in January 2014, the German 10-year rate was 2%, but in January 2015, the same rate had fallen to 0.5%.

For an investor who bought a bond 2 % in January 2014, it does not change: it will continue to receive 2 euros each year until maturity of the obligation. The difference is simply to observe that a new investor, buying a 0.5% German bond in January 2015, only benefit coupons 50 cents (0.5%) for 10 years until repayment initial capital.

So far yet, all is well.

the exchange value of a bond varies with market rates

But the bond market, an investor can sell a bond at any time. Depending on changes in market rates, the exchange price of this obligation varies

This makes sense. For example, if an investor bought a German duty rate of 2% in January 2014 and he wishes to resell in January 2015 while the market rate fell to 0.5%, buyers will be willing to pay more for this obligation, which offers a yield (2%) higher than the market rate then prevalent (0.5%).

Very concretely, and without detailing the calculations, a bond issued 2% to 100 euros in January 2014 has been sold for about 114 euros in January 2015 to meet the new market rates. Indeed, buying 114 euros an obligation relating 2 euros per year for 9 years (one year has passed compared to the original issue), the buyer of this obligation has a real return of corresponding to about 0.5% then observed market rates.

In short, when market rates fall, the value of listed bonds increases. The relationship also works the other way: most investors are likely to want to buy German bonds safely over their exchange price increases, leading to lower rates of return of these investments (rate market)

rate negative. the logical culmination of a very high demand

Thus, pursuing this logic, it does not seem surprising that the price of the 10-year bond issued at 100 euros in January 2014 to reach 115, 116 or 117 euros when investor interest grows for German bonds ‘risk free’.

in reaching such 116,4 euro in January 2016, the requirement in question goes into negative real rates: it will report to the one who buys a return of 2 euros per year for 8 years (two years have passed ) or 16 euros accumulated coupons plus a rebate of 100 euros at maturity.

the buyer is going to lose money if he keeps this obligation until maturity, as has purchased 116.4 euros an asset that will have brought him 116 euros in 8 years. The actual rate of the duty is -0.34%. Here we are close enough prices and rates actually observed in the market for German government bonds earlier this year (the rate to 8 years).

It is therefore understandable that the performance of current 10-year bonds (which were bonds to 12 years ago 2 years) can fall into negative territory by the same mechanism.

Why investors are willing to experience negative rates?

The mechanism is mathematically explained without difficulty, but one question remains: how can an investor be enough “beast” to buy a more expensive obligation that it will bring him ? In other words, why buy bonds at negative rates? Several simple answers must be advanced.

First, government bond rates have a strong tendency to adjust to inflation forecasts in the source countries. But in the eurozone, inflation is currently zero or even negative, and many investors doubt that inflation rises in the coming years. Thus, it is not illogical that the government bond rates are low.

In addition, many buyers of bonds are no longer individuals who think in terms of performance, but financial institutions, including banks and insurance companies, which are forced to buy large amounts of these assets “safe” to comply with the prudential rules imposed on them (Basel III / Solvency II). Where a request for such securities glut that causes their prices up and their yields lower.

Last but not least, the European Central Bank always buys regularly European government bonds in the part of its “quantitative easing” (recovery Plan started in March 2015). Due to the impressive demand for securities by the ECB (80 billion euros of purchases per month in the markets), bond prices still pushed up and rates down. To the point that Germany can now obtain financing at negative real interest rates on the markets for the whole maturity of up to 10 years.

The attractiveness of German bonds “safe” is also strengthened in the short term by current uncertainties about the risk of “Brexit” pushing investors to sell their risky assets (including shares) and refer temporarily to AAA debt / AA + bond market.

It is recalled for comparison that France borrows in turn now to 0.39% at 10 years and negative rates for maturities of 5 years or less.

Xavier Bargue ( redaction@boursorama.fr)

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