On Monday, Germany gained entrance to a rarified club of sovereign nations paid to borrow money. This US accomplished this feat during the depths of the financial crisis. Now Germany is able to achieve the same feat during the Eurozone sovereign debt crisis. In a debt auction on Monday, Germany was able to sell 3.9B EUR worth of six-month debt priced at an average yield of -0.0122%. The auction was almost 2x oversubscribed. Investors were willing to pay Germany a little over a basis point to take money for six months and simply give it back. These are fascinating times within financial markets, where there is no term premium for money and such extreme risk aversion. There are a number of items which will have implications for financial markets for an extended period; one, the reason why interest rates have approached and breached the zero bound, and two, the implications of risk-aversion reaching such extremes. There is really only one supply/demand based reason for interest rates to approach the zero bound: “Savings Glut” – the supply and demand of risk-averse funds is skewed dramatically. Excess supply (glut) of savings leads to compression of nominal returns. Capital abounds while risk-appetite is […]
On Monday, Germany gained entrance to a rarified club of sovereign nations paid to borrow money. This US accomplished this feat during the depths of the financial crisis. Now Germany is able to achieve the same feat during the Eurozone sovereign debt crisis. In a debt auction on Monday, Germany was able to sell 3.9B EUR worth of six-month debt priced at an average yield of -0.0122%. The auction was almost 2x oversubscribed. Investors were willing to pay Germany a little over a basis point to take money for six months and simply give it back. These are fascinating times within financial markets, where there is no term premium for money and such extreme risk aversion. There are a number of items which will have implications for financial markets for an extended period; one, the reason why interest rates have approached and breached the zero bound, and two, the implications of risk-aversion reaching such extremes. There is really only one supply/demand based reason for interest rates to approach the zero bound: “Savings Glut” – the supply and demand of risk-averse funds is skewed dramatically. Excess supply (glut) of savings leads to compression of nominal returns. Capital abounds while risk-appetite is […]