Jane Hathaway’s phone will be busy today. Granny’s chickens are coming home to roost. Time for Jethro Bodine to break out the moonshine.
(Bloomberg App)
The 10 year German bond crossed a red line in the sand, going negative. I’ll take a shot at explaining what that means and why it matters.
Germany is part of the Euro Zone, using the Euro as its currency. It issues a 10 year bond that pays a 1/2 of one percent interest rate (0.5%) – so for each 1000 Euros (€) you lend, you receive €5 a year interest, not very much.
But the €1000 bond doesn’t sell for exactly €1000. It moves up and down based on demand.
So right now, you have to pay €1,049.9 (the number to the right x 10) and at the end of 10 years, you will get back €1000 – losing €49.9 for the privilege of giving Germany your money for 10 years. It is not quite that simple, since you will be getting €5 a year for 10 years, but because those payments are in the future but your €49.9 is being paid now, the math works out that you are losing money.
Why is this happening? Debt of all the Eurozone countries are in Euros, but each country has different levels of risk, and different tax laws. Right now the market is saying Germany is the safest place to put your wealth (in the Eurozone).
The United Kingdom never adopted the Euro, and if the British people vote to leave the European Union, bad things might happen. Just like the Federal Reserve, the European Central Bank has been trying to stimulate the economy by handing out “free” money, but the money isn’t doing anything other than pumping up takeover activity. Consumers aren’t spending, and factories aren’t being built. When the bank pays you to borrow money and you don’t want it, things are very, very sick.
So some people might think the UK is making a huge mistake and would rather have “safe” Euros rather than risky Pound Sterling (£). When the pound loses value, the money parked in Germany will be worth more, even though it is losing a little.
If you’re too young to get the reference, Jedd Campett, the patriarch of the Beverly Hillbillies TV family was amazed that Mr Drysdale, the banker, would keep his money safe without charging him a service fee.