Zero Bund Yields No Deterrent to Euro

Investors are willing to own German bunds at zero yields on speculation the currency boost from a euro breakup would compensate for the sacrifice in returns.

“If you buy German assets denominated in euros today, you could find yourself holding an asset in a superior currency in a breakup scenario,” said Jamie Stuttard, who helps oversee $1.6 trillion as head of international bonds at Fidelity Management and Research Co. in London. “There isn’t a lot of value in German government bonds at these yield levels, and the single best reason to own German assets is re-denomination risk.”

The yield on German notes maturing in 2014 dropped below zero on June 1 and has been negative each day since July 6. While European leaders said they are working on a plan to help defuse the debt crisis, traders raised bets on euro disintegration. The implied probability of a country leaving the monetary union by the end of 2014 rose to 66 percent last week from 64 percent a week ago, according to bets on Intrade.com.

“The currency trade is the main driver of low yields, not only in Germany but also in Switzerland, France, Austria, the Netherlands and Belgium,” said Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG in Zurich. The debt problem of peripheral countries “is the strength of Germany, Austria and France. Without this weakness, the stronger countries would never pay such low yields.”

Belgium’s five-year borrowing cost of 1.31 percent is within 20 basis points of the record low reached July 20. Investors earn just 0.15 percent on French two-year notes and 0.5 percent on Dutch securities with similar maturities.

Bloomberg

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