German government bonds fall below zero percent


Imagine if you were so worried about the global economy that you were willing to pay for a government to hold your money for you.

That is the reality for people investing in ten-year German government bonds right now.

The yield, or real interest rate, on the ten-year German 'bund' has fallen below zero percent. That means investors are essentially paying for the privilege of having the German federal government look after their cash.

The German government issues the bonds to finance its spending. Investors buy the bonds (typically of 10 year or 30 year duration) and receive regular interest payments.

But investors can sell those bonds to someone else before the maturity date.

That is why the yield has fallen below zero.

Investors are spooked by the prospects of Britain leaving the European Union. They are worried it could prompt a slump in other assets like the pound and global shares.

So they have been heading to "safe haven" investments like German government bonds.

They are so keen to get their hands on the bonds that they have bid up their resale price. As the prices goes up, the yield, or real interest rate, falls.

The bonds are considered to be a safe haven because they believe the German government can be relied upon to repay the money when the bonds mature.

The bonds are also considered to be highly liquid. That means they can be easily resold at short notice. That liquidity is important to investment funds with billions of dollars of assets invested in markets around the world.

The yields have also fallen below zero for Japanese and Swiss government debt.

Recent opinion polls show the 'Leave' campaign is leading the Brexit debate.

But beware pollsters bearing numbers.

The polls could be influenced by the way that the opinions are solicited. Some are collected online and some are collected by phone.

The phone polls have shown more support for Brexit, although the margin is narrowing. That could be because people have been reluctant to tell people they intend to vote to leave.

Pollsters say the online polls often also allow for people to opt for 'Undecided'.

It is hard to overstate the importance of the undecided voters.

Some analysts say that when they go into the polling booths a majority of them might opt for the status quo.

That is because there is so much uncertainty and guesswork involved when it comes to saying what the economic effects of Brexit would be. So people might not want to gamble on Brexit.

Speaking of gambling, the bookmakers say betting still favours the 'Remain' vote.

However even there the margins are narrowing, with bookmaker William Hill saying the 'Leave' vote is likely to take the lead by the weekend.