Bund yield turns negative as investors seek safe harbours

The yield investors receive for lending to Germany for 12 months has turned negative for first time in recent history, as high demand for safe harbours sends prices upwards.

This has happened despite an only partly-successful Bund auction last week.

The yield on 1-year Bunds has reached -0.07%, meaning investors are effectively paying for the right to hold German government debt.

This week’s occurrence follows yields on six-month German debt turning negative last week, the first time since 1999.

Investors have flocked to core Europe’s debt, and deserted peripheral equivalents and bank bonds, as the eurozone crisis sharpens.

Franz Wenzel (pictured), responsible for investment strategy at AXA Investment Managers, said Germany should remain a safe harbour next year.

“While Asia will be the growth engine of the world next year, Germany will belong to the most stable economies within the eurozone.”

Axa is concentrating on high grade sovereign and corporate bonds, rather than riskier equities in the region.

As reasons for Germany to remain safer next year, Wenzel pointed to wage restraint over the past year that has strengthened the cost competitiveness of German businesses; to Germany’s export economy benefiting from sustainable growth in emerging markets in 2012; and to the low levels of new debt. Axa foresees weak but stable growth of 0.5%, and 1% to the end of the year.

Wenzel added Germany can rely on keeping its solid AAA rating, in contrast to the US which this year lost its top notch, and France, whose creditworthiness stands “on shaky legs”.

While focused more on fixed income, Axa is underweight European shares, in expectation of a double-digit drop in profits of European companies next year.

European equities would become attractive to Axa again if they fell by 10% to 15%, and the price earnings ratio went to 7.5 to 8 times.

Wenzel foresees the Frankfurt-based bank lowering short term rates below 1%, to begin a course of quantitative easing.

“As long as the political decision makers do not find a solution to the eurozone, the risk aversion would climb further,” he said. He expects a renewed upswing towards the end of 2012, and this would favour risk assets such as shares.

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