German government bonds are facing stiffer competition for investor cash from other traditional havens such as gold than they have for years, as German fiscal plans and the reduction of holdings by the European Central Bank raise concerns about a supply-demand imbalance which could drive yields higher.
In the year from May 2008 to May 2009, as the global financial crisis unfolded, the dollar was the standout gainer, with a rise of 14% followed by the Japanese yen. But German Bunds were not far behind, up nearly 6% in price – similar to gold’s gain – while Treasury prices were almost unchanged and the Swiss franc lost 6%, data from LSEG shows.
Taking the group of six classic safe-haven assets including the Swiss franc, Bunds’ price gains lagged those of bullion and the franc during the 2020 pandemic-era market ructions and the selloff in U.S. assets following President Donald Trump’s sweeping tariff announcement in April, the data shows.
Even before they got caught up in the global government bond rout this week as the air war in the Middle East and the oil price spike revived inflation fears, there were more signs German Bunds were losing ground to the other havens.
They slipped further down those price performance rankings, edged out by Treasuries after Trump’s repeated threats to annex Greenland and pressure on NATO allies to increase defence spending refocused investor attention on Germany’s planned fiscal boost and possible debt spree.
“With any shock that pushes us further down that path (of more fiscal spending), Bunds will probably act less as a safe haven than they did in the past,” said James Bilson, fixed income strategist at Schroders, referring to Greenland.
“We’re currently somewhat underweight, or effectively short, German Bunds versus the UK, and also on an outright basis,” Bilson added.
Bunds are also among the lowest-yielding major economy bonds, at just 2.71%, compared with 4.02% for 10-year Treasuries, or 4.4% for UK gilts, making them less attractive to those investors looking for higher returns, analysts said.
GERMAN ECONOMY STILL WEAK, EU JOINT-ISSUANCE IN FOCUS
To be sure, economists expect Germany’s planned fiscal stimulus to be a strong boost for the economy, but from 2027, meaning growth could still struggle for the rest of this year. In the meantime, gross domestic product in some Southern European countries including Spain continues to grow and they are maintaining fiscal discipline, leading to credit rating upgrades.
Bund prices rose roughly in line with those of French and Italian bonds during the tech-led stock market selloff in February. The closely watched premium investors demand to hold Italy’s 10-year bonds over Germany’s – or yield spread – hovered around 61 basis points. It had shrunk to about 53 bps in January, its lowest since summer 2008.
Anticipation of more EU joint debt issuance has also helped bonds of highly indebted member states such as Italy and France, which have benefited for years from the various tools the ECB has in place to prevent any dislocation in national borrowing costs. Such issuance would allow for more even sharing of the euro zone’s debt burden.
These factors keep those yields close to those of Germany, which has limited outperformance of Bunds.
“What we are seeing right now is that the region is showing signs of convergence, that is more of a reason to expect Bunds to rally less than in previous times (of crisis),” said Luca Salford, euro rates strategist at Morgan Stanley.
“We are very far from starting quantitative easing measures again and from concerns about other countries being significantly more at risk than Germany from a macro point of view,” he added.
As the ECB rolled off bond holdings it purchased during its COVID-era quantitative easing programme – this has also weighed disproportionately on Bunds as Europe’s biggest economy supplied the largest chunk of the purchases.
“Bunds will still have a haven space, but after a structural change in the fixed income market, they’re competing” against other safe haven assets like the Swiss franc and the yen, said Rufaro Chiriseri, head of fixed income at RBC Wealth Management.
“With the ECB no longer a major buyer in the bond market, the share of yield-sensitive investors is rising, and that matters even more for Germany, which still relies on foreign investors outside the euro area for around 40% of its demand,” she added.
(Reporting by Stefano Rebaudo)
