Europe: When Losing Money Makes Sense

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There is a remarkable trend developing in European bond markets, where investors are increasingly willing to lend money to certain governments in exchange for next to nothing.

In the most extreme example, yields on 2-year German bonds turned negative this week, falling to a record -0.5%. That means, in theory at least, investors could end up losing money if they hold the bonds to maturity.

Germany is the eurozone’s largest economy and its bunds are considered among the safest assets available for investors who are expecting the worst. But the flight to safety is becoming more widespread as investors hunt for a marginally better return.

This week, 2-year yields briefly turned negative for France, while Denmark and Switzerland are more firmly below zero. Short-term yields for AAA-rated Finland and the Netherlands fell to record lows.

The trend reflects a heightened aversion to risk as Spain and Italy struggle to avoid falling victim to the crisis that dragged down Greece, Portugal and Ireland. Yields on bonds issued by Italy and Spain rose this week as investors demand higher premiums to hold debt that is considered risky.

“The rise in benchmark yields in say Italy and Spain to worryingly high levels shows a deep concern amongst many participants about their fiscal sustainability,” said Andrew Milligan, head of global strategy at Standard Life Investments. ... Continue to read.

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