TH woke up this morning to the news that Germany had sold 6 month bills at a small but negative rate of interest. He hadn’t ever heard of this happening in a bond market before. The only other instances of negative interest rates that he could think of were (he thinks) were negative overnight interest rates in Japan (this has happened a few times the first being during the Asian crisis, then again in 2003 and again during the global financial crisis, largely for technical reasons, see www.abc.net.au/pm/content/2003/s893425.htm) and in Sweden (where the banks had to pay to leave money with the central banks during the crisis for regulatory reasons).
At first, the negative 6 month yield struck him as just an interesting curiosum in a stressed financial market. But upon looking out the bus window for a while, he started to ask why this happened.
The negative yield essentially means that markets in Europe are prepared to pay the German government money to keep their cash safe for the next 6 months. To TH this signals a couple of things.
First, markets are worried about a major banking crisis in Europe. Clearly, the some elements of the market are willing to pay not to keep their cash in the banking system.
Second, the fact that they are willing to pay for the German government to keep it safe is interesting too. Perhaps it signals that, if the aforementioned banking crisis was to happen, it is because markets believe that it will involve some fracturing of the Euro area. If that happened (say, the euro broke up into a deutschemark zone and a peso/lira zone), then you would rather hold German assets, because they would surely appreciate.
All this is a bit … negative. But one positive is that it is apparent that markets are not abandoning euro area assets (nor the euro) altogether. This, like the incredible market craving for US dollars as the US subprime crisis erupted, signals some sort of confidence in some Euro area institutions. It’s troubling that they are craving a similar class of assets once again.