German 10 yr Bond Yield Near 0%

It is difficult to comprehend how investors would want to invest in a 10 year fixed rate that provides almost no return.

In essence, they would have to be quite worried about deflation and the security of a German bond (bund) is the safety feature driving their purchasing decisions.

The European Central Bank is also assisting in this low yield as they continue to purchase bonds and reduce the supply with their version of a program of quantitative easing.

With yields as low as they are in Germany, other investors are looking to North American bond markets for higher yield (with similar credit quality) driving prices higher and yields lower.

click on the chart to enlarge

• US 10 yr yields this year have dipped to near 1.80%, despite anticipation of a US Fed rate increase.
• Cdn 10 yr yields have fallen to near 1.50%.
• Interestingly, with the inflation levels reported last week, the "real" return on US bonds (bond yield - inflation) = 0%
• In Canada, with the core rate of inflation at 2.4%, the real return is -.9%.
• Investors looking for better returns than this are being forced from the safety of bond markets and are taking on more risk in the equity markets.
• At the same time, corporations are borrowing at very low rates of interest to buy back their own shares.
• This is what we mean when we say that central bank stimulus (pushing interest rates lower) is driving asset prices higher.
• As more money flows into equity markets, equity prices are driven higher, perhaps higher than the fundamentals might suggest.
• When the media start to refer to this as the "new normal", that is when complacency starts to set in.
• We do need to be all the more cautious as this scenario develops.

More on this and some up to the minute budget commentary on our weekly webinar today at 4:15pm.

If you would like to participate or receive a recorded version, please email bianca@highrockcapital.ca