German Yields Show Government Bonds Aren't So Safe: -0.079%

By Lee Herzog and Karl Cates | July 26, 2012
  • What's Happening

    What's Happening

    Investors often turn to top-rated government bonds to minimize risk while generating a return. Yet it can be a mistake to think that a zero-percent return on a top-rated government bond is as bad as it gets. During the Depression, many coupon-bearing U.S. government securities provided negative yields. Today, the yield on the 2-year German government bond is -0.079 percent, and Germany and France recently sold six-month bonds with slightly negative yields. Switzerland's five-year government debt trades at a negative yield, and the one-year Dutch bond recently turned negative. Skittish investors are willing to pay the government to hold their money. "It's not return on capital, it's return of capital," says Peter Allwright of London's RWC Partners.

    Photograph by Michele Tantussi/Bloomberg

  • Why It Matters

    Why It Matters

    Rock-bottom interest rates hurt returns on money-market funds, whose holdings are skewed heavily toward short-term government debt. If you factor inflation into the equation, the yields on a lot of developed-world short- and medium-term government debt have actually been negative for much of the past four years. Put another way, investors who own money-market funds have actually lost money and will probably continue to do so, since central banks are expected to keep rates very low for the foreseeable future. The Bloomberg survey consensus forecast is for the Federal Reserve's benchmark to rise to only 0.38 percent by the end of 2013 (today it is at 0.25 percent).

  • What It Means for Your Portfolio

    What It Means for Your Portfolio

    It's all but impossible today for investors to gain much real yield in short-term, cash-alternative investments, especially if those holdings are tied to Europe. Three major U.S. asset-management firms -- Blackrock, JPMorgan and Goldman Sachs -- closed their European money-market funds to new investment after the European Central Bank's decision in early July to lower deposit rates to zero. Money-market funds, in short, aren't making any money. Bill Gross at Pacific Investment Management, says that investors may be able to maintain purchasing power better with real assets, such as inflation-linked bonds, commodities and real estate.

    Photograph by Scott Eells/Bloomberg

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