German Yields: Negative Charge

Midweek Bond Update

German Yields: Negative Charge

Despite recent rate-cutting by central banks, German bund yields have been creeping higher.


German Yields: Negative charge

Amid the prevailing gloom about Europe’s current growth rate, the yield of the ten-year German Bund reached an all-time low of -0.72% on August 28, 2019.

Since then, the yield has risen some 38 basis points (bps) to -0.34%.1 Behind the reversal: a belated acknowledgement on the part of the European Central Bank (ECB) that their plan to back away from ultra-accommodative policies (i.e. buying bonds and holding their benchmark rates at or below zero) was premature. That, added to the Fed’s recent reductions in the Fed Funds target rate, appears to have convinced investors that conditions have changed sufficiently since August to add some risk to their asset mix. The result, at least for 10-year Bunds, has been the paradoxical rise in yields in spite of the latest round of central bank rate-cutting.

 

Chart courtesy of Brandywine Global. Source: Bloomberg, as of 11/12/2019. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

If the thaw in global trade negotiations that many are anticipating does indeed come to pass, the combination of central bank backing and improved global growth could help bring about the revival of global growth that’s already being tentatively reflected in Germany’s bond market.

But rising yields haven’t been restricted to Germany.  As a result of this shift in sentiment and related factors, the total market value of the world’s negative yielding debt has fallen sharply from an all-time high of some $17 trillion to $12.3 trillion.2  
 

On the rise: U.S. Housing Construction

October saw construction starts of residential buildings rise 3.8% to an annualized rate of 1.31 million, a strong figure in line with consensus expectations. Building permits for future construction rose 5% to a 1.46 million annualized pace, the largest annualized rate since May 2007. For single-family homes, construction starts rose 2% to 936,000, the strongest rise since January; single-family construction permits rose 3.2% to a 909,000 pace, fastest since August 2007. Much of the credit for the increase goes to stable-to-declining mortgage interest rates in the wake of the interest rate cuts by the Fed. But strong confidence in the economy on the part of both potential and actual homebuyers is likely to have had a role as well.

In an indication of a growing construction backlog, 181,000 homes received construction authorization but were not yet under construction, the most since March.
 

On the slide: U.S. Household Debt Burden

Reflecting the continued confidence of U.S. consumers, several key measures of household indebtedness are on the decline.  As of the end of Q2 2019, the ratio of U.S. household total indebtedness to disposable income declined to 96.6%, a low not seen since Q3 2001. The cost to service household debt stood at 9.7% of household disposable income as of Q2 2019, well below its peak of 13.2% at the end of Q4 2007, during the depths of the 2007-2009 recession.

If the continued growth of the U.S. economy depends on the financial resources and general optimism of the U.S. consumer, the overall economic outlook appears to be positive—assuming present trends continue, and external events don’t intervene.

 

Note: The year for all dates is 2019 unless otherwise indicated


1 Source: Bloomberg, 11/19/19

2 Source: Bloomberg, 11/19/19

Definitions:

Bunds” refers to bonds issued by Germany's federal government. Bunds are available in 10- and 30-year maturities.

A basis point (bps) is one one-hundredth of one percentage point (1/100% or 0.01%).

The European Central Bank (ECB) is responsible for the monetary system of the European Union (EU) and the euro currency.

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The federal funds rate (fed funds rate, fed funds target rate or intended federal funds rate) is a target interest rate that is set by the FOMC for implementing U.S. monetary policies. It is the interest rate that banks with excess reserves at a U.S. Federal Reserve district bank charge other banks that need overnight loans.

 

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