German bond yields go negative

German yields turn negative as European Court of Justice supports QE (Part 4 of 4)

German bond yields turn negative as market prices in QE effect

By Stephanie Johnson • Jan 16, 2015 2:07 pm EST

German bond yields

Germany (EWG) accounts for about 18% of the ECB’s (European Central Bank) capital. Currently, yields on certain German government bonds are already below zero. QE (quantitative easing) measures such as the ECB’s bond-buying program could push yields on German bonds further down.

Enlarge Graph

Rising bond yields signal growth

When an economy is growing, bond yields tend to rise. Increased economic activity leads to an increase in consumer spending, which boosts inflation as demand for goods and services increases. Expectations of a rise in the inflation rate sends bond yields up as investors’ expected return, which factors in inflation expectations, goes up. Hence, rising bond yields indicate a growing economy.

Similarly, declining bond yields spell economic contraction and low inflation expectations.

German bond yields enter negative territory

On January 14, the five-year German government bond plunged into negative territory with the yield at -0.014%. Market expectations seem to have factored in the interim decision of the European Court of Justice (or ECJ) in favor of the ECB’s monetary easing measures. Since then, German bond yields on the five-year German government bond have remained in the negative territory, closing at a record low of -0.05% on January 15.

At the same time, yields on the ten-year German government bond, also known as the German bund, also saw a dip. The German bund serves as a benchmark for all other European (VGK)(EZU) (FEZ) (EFA) economies. Yields on the German bund lost 15.3 basis points between December 16, 2014, and January 16, 2015.

To learn more about Europe’s weakening economy and how the ECB plans to rescue the Eurozone from another crisis, read our earlier series Draghinomics: Why Europe needs help fast.

Source