Germany gets money for nothing amid capital flight

Old_Joe

"Germany’s central bank, the Bundesbank, announced Tuesday that it expects to sell two-year treasury notes carrying a big, fat zero per cent coupon. Factor in inflation and you, the buyer, are effectively paying the German government to warehouse your money."

"German 10-year bonds now yield less than 1.5 per cent, well lower than U.S. and U.K. yields."

"Bond investors are clearly more concerned about return of capital than return on capital."

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scott

That which is not sustainable is until it suddenly isn't. I do understand that there are older generations who are not interested in taking risk, but my fear is what is perceived to be "low risk" cracks and things get very interesting very quickly.

Old_Joe

For sure.

catch22

To be concerned about the "S*#& Outta Luck" train leaving the station without me or you, the individual investor, applies to more than just the bonds, eh?

scott

Reply to @catch22: I think the real concern is having a period - and potentially a long period - where there are no good answers for investors. More volatility, more drama, more crises and more average investors leaving the financial markets.

I don't think investing in bonds that pay nothing (quite literally!) or next-to-nothing is *an* answer, though. I understand that dividend stocks are beyond the desired risk level of those in/near/around retirement age, but investing in bonds that tons of people are piling into that pay next-to-nothing may not be the right answer for conservative investors, either. There are other things - I'd rather suggest high quality corporate bonds rather than govt bonds if investors have to be in fixed income. Preferred stocks, perhaps? Although there is risk and potential volatility there. Any which way, the idea of a risk asset that pays nothing for the risk though is just bizarre in terms of there being demand unless we're going into a crisis that makes 2008 look like a tea party (or, to use Jamie Dimon terms, a "tempest in a teapot".) And even if that's the case, why just not be in cash?

Anyway,

Germany is selling (today) zero coupon two year bonds. (http://online.wsj.com/article/BT-CO-20120522-709354.html)

So, you're telling me that, rather than be in cash (and not keep up with inflation), people are running to bonds that pay them nothing (and don't keep up with inflation?) Having there be demand for zero coupon bonds (being paid nothing for the risk, and *there is* risk with any govt bond, despite this apparent view to the contrary) makes zero fundamental sense - and there is some discussion that Germany may offer negative yield bonds.

You're likely going to get government responses if things go further South and if not and this turns into another crisis, I think the responses will be interesting if people start asking how trillions and trillions pumped into the financial markets only created short-term fixes and no long-term solutions.

The German offering just went off a minute ago and apparently went reasonably well.

Old_Joe

Reply to @scott: Hard to know why anyone would opt for a Ø bond rather than simply remain in cash, unless perhaps there is not a viable German/European equivalent of the FDIC coverage? In that case I suppose that the government would be safer than a bank.

scott

Reply to @Old_Joe: Interesting point. A lot of discussion today about demand coming from outlying European countries, as well (Greeks worried whether one day they may not be in the Euro?) If these are the factors, that would speak to a European situation that would seem quite possibly worse than anyone wants to admit.

Um, market down 160 seems to be thinking that may be a possibility, as well.

Investor

Reply to @Old_Joe: Good thinking Old Joe. Yes, the FDIC equivalent state protection for bank accounts varies by country. There may be limits on coverage and also it would be only applicable for individuals. Institutional money with large sums concerned needs somewhere to park the money.