That hasn’t happened for a long time: for the first time in almost three years, the yield on ten-year federal bonds jumped above zero percent on Wednesday. This gives investors money for a loan to the state again. However, experts do not want to speak of a sustainable turnaround in interest rates. It will be years before savers get noticeable interest rates again.
How much have interest rates on German government bonds risen?
On Tuesday morning, ten-year Bunds were up 0.025 percent, the first time since May 2019. This marks the end of a long phase of negative interest rates – in the bond world they are referred to as “yields”. At the low point in March 2020, the minus was even 0.84 percent. Bunds with terms shorter than ten years are currently still trading negatively. This means that investors do not receive any interest from the federal government, but pay extra.
Why have interest rates risen?
“The increase is a market reaction to the high inflation,” says Elmar Völker, bond expert at Landesbank Baden-Württemberg (LBBW). As a result, bonds are less profitable for investors, who sell the paper. The bond price falls, which means that the yield automatically increases according to a mathematical formula. It was reinforced by the fact that the corona situation has apparently eased recently. As a result, bonds are less in demand as a safe haven. The trend comes mainly from the USA, where the first rate hike is imminent. For Jörg Krämer, chief economist at Commerzbank, there is now another factor, because “the markets are expecting the European Central Bank (ECB) to raise interest rates as early as autumn”. Higher central bank interest rates mean higher yields on bonds.
Do they keep climbing?
The zero line has a certain psychological meaning. This is similar to the significant thousand steps, for example, in the German stock index. That’s what many investors do. If the line is broken upwards sustainably, this gives additional impetus. “We expect interest rates to continue to rise slightly,” says LBBW expert Völker. At the end of the year he sees the return on ten-year Bunds at plus 0.2 percent. However, five- and two-year Bunds would remain in negative territory for a longer period of time.
Is that already a turnaround in interest rates?
Even if the trend is upwards, experts are not yet talking about a turnaround in interest rates. The ECB has recently signaled that it takes the high inflation figures seriously, but on the other hand it is only very slowly reducing its loose monetary policy because it still considers the economy to be too weak. “In the foreseeable future, however, there will be no sustainable turnaround in interest rates to the earlier times with bond yields of three to four percent,” says Elmar Völker from LBBW.
Are interest rates on savings now also rising?
The fact that the yield on ten-year Bunds is positive again has not yet had any direct impact on other interest rates, especially since shorter maturities are still negative. Bond yields are the earliest indicator. In order for banks to also raise interest rates on their customers’ deposits, the central bank would first have to raise key interest rates. And experience has shown that banks only pass this on to customers with a delay. “So it will be years before savers receive noticeably higher interest rates for overnight or fixed-term deposits,” says Völker.
Will the finance minister have to pay interest on debt service again in the future?
If the trend continues, yes. But this does not mean that Germany slips into a precarious financial situation. “The fact that the zero line has now been crossed is not of great importance in itself, especially not for the sustainability of public finances,” says tax estimator and expert at the Kiel Institute for the World Economy (IfW), Jens Boysen-Hogrefe. However, should the trend materialize and yields continue to rise, deficit financing is likely to become increasingly problematic. “This then applies not only to the federal government, but to public finances in the entire euro area.”
What does that mean for the stability of the financial markets?
Bunds are the gold currency on the bond markets. The yields on the promissory notes of the other euro countries are based on the level of federal bonds – and they are higher. One speaks here of the spread. In the euro debt crisis of 2012, these spreads for Italy, Spain and other financially weaker euro countries rose sharply – there was a risk of over-indebtedness. The ECB under Mario Draghi intervened. That protective shield is still open. “With its purchase program, the ECB is artificially reducing government bonds, meaning that interest rates remain at a low level,” says Commerzbank chief economist Krämer. The rise in yields on Bunds therefore has no major impact on the stability of the financial markets in the euro zone. “The spreads to Italy have only increased slightly – Italy can still refinance itself cheaply,” says Kramer.