Amid escalating trade tensions, German fiscal stimulus and divergence in central banking policies between the US and the eurozone, German sovereign debt has become a favorable option for risk aversion investors. Benchmark 10-year residues began the year that started at about 2.1%, surged in March before falling in early April, and are currently trading around 2.48%.
Despite high demand, investors hope that the band’s yields will continue to rise as Germany’s ambitious spending plans begin on Gear.
“We’ve seen a lot of effort into this world,” said Shannon Kilwin, manager research analyst at Morningstar. “On the one hand, expectations for an increase in fiscal spending and increased debt issuance are boosting yields, while on the other hand, weak economic growth and Reducing ECB rates It’s pushing down yields.
“At the same time, the Trump administration’s economic policy and trade war has shaken investors’ confidence in the US Treasury as the ultimate safe haven asset, and instead have seen German herds.
Pressure on the US Treasury will help bands
Meanwhile, the US bond market is under new pressure as President Donald Trump’s new tax bill gained traction in early June. Investors are worried that the law could add more than $3 trillion to the deficit over the next decade. Consultation of sustained inflation and policy uncertainty have become even more intense on feelings.
Kilwin says that as long as we continue to trust and grow, our interest in the band could continue. “If investors regain comfort with the US Treasury or meaningfully pick up eurozone growth and inflation, that trend could be reversed. And while recent trade war headlines have attracted attention from Germany’s defence spending plans, long-term trauma yields could rise as these focuses.”
Hakem Saidi, senior portfolio manager global bonds at Bayernvest, said, “The era of cheap money is over. Given the increased volume of issue and geopolitical uncertainty, the 3% interest rate on German government bonds for 10 years is no exception and appears to be a new normal.”
The band is back, but not as a risk-free autopilot investment, he says.
“10-year bond investors are now seeing a slightly positive real yield once again. However, with the rise in government debt and high interest rate volatility, this is not a return to the old order, but a new administration.”
According to DWS, the band regained their appeal thanks to its risk/reward improvement profile, particularly compared to the US Treasury Department. “Their solidity, and their generally higher yield levels, compared to the US Treasury, all claim to be in favor of the chest,” according to Vincenzo Vedda, chief investment officer at DWS.
Is German bands comparable to finance?
“Now, German government bonds are not replacing the US Treasury Department.
In his view, there are two factors behind this. First, there is no structural change in favor of the eurozone, and secondly, the German government’s bond market is simply too simple. “The US Treasury’s daily trading volume is between $600 billion and $1 trillion. What you can see in German government bonds is at least 10-20 times.”
Still, Freitag sees the potential of asset classes. “What we really see is the possibility of diversifying the currency zone.” For international investors, creditworthiness is not the only factor they consider. More importantly, the questions. What currency do you want to hold and how expensive is it if you need to hedge the risk of the currency?
Euro bonds are often less attractive to dollar-based investors, especially when currency hedging costs are taken into account, compared to products controlled by the yen or dollar, but the band remains attractive to euro-based investors. “This is the most liquid market in the Euro region and Germany is one of three countries with an AAA rating,” adds Freitag.
For example, Morningstar DBRS assigns AAA ratings only to Germany, the Netherlands and Luxembourg within the eurozone.
Assenagon’s CIO multi-asset, Thomas Romig, is not too enthusiastic about Germany’s long-term government bonds. “We are skeptical of government bonds for two reasons. We don’t expect inflation to drop sharply like in 2010. This means that actual yields remain low.” Furthermore, government bonds generally have a long period of time. “When we invest in bonds, we prefer corporate bonds with shorter maturities, where the risk/reward ratio is superior,” he says.
Furthermore, government bonds no longer offer reliable protection against stock volatility. “Until March 2021, there was a negative correlation between stocks and bonds. Since then, this ‘insurance effect’ has disappeared,” he adds. The correlation between the two asset classes has been slightly positive over the past few years.
The yield curve has been steeper this year, but long-term breast yields have risen sharply than those of short bonds, but steeper slopes are not enough to justify long-term, abundant band investments. “The difference between two- and 10-year German government bonds is currently only 0.6%. This is not attractive for long-term investments. We will only consider this if the spread exceeds 1% over the course of a decade.”
European assets flows also show preferences for bonds for shorter periods as the ECB approaches the end of the rate reduction cycle. Investor demand for short-term Euro government open-ended and ETF bond funds has been captured this year, with net inflows hitting a multi-year record of 1.8 billion euros, according to Morningstar Direct Data. Meanwhile, it has not shown a positive trend this year, flowing into vehicles holding eurozone bonds of various maturities.
Germany and Southern European bonds spread to multi-year lows
Despite volatility elsewhere, the eurozone spread remains harsh. As of June 10th, the spread between Italian BTPS and the decade band had shrunk to 0.91 percentage points. The lowest since early 2021. The French and Spanish spreads are also compressed.
Rothschild’s Freytag interprets this as a subtle indication of today’s market sentiment towards risk.
“We are at a stage where risk assets are working very well. DAX is close to the highest ever. In my view, high risk appetite is generally the main argument for good performance. Government bonds surrounding the eurozone. Furthermore, there are very few headwinds from surrounding countries. ”
