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Investors draw the line at free debt for 30 years

Germany fails in bid to sell €2bn of long-term bonds

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(stock photo)

(stock photo)

(stock photo)

The German government failed to shift even half of a planned €2bn bond deal yesterday as investors baulked at the zero interest being offered to lend to the country for 30 years.

The failed deal saw Germany's debt office find takers for just €824m of bonds, in a rare sign of investors pushing back against the collapse in investment returns available on the bond market.

The German government had no urgent need of the cash and can still borrow for effectively free for shorter terms.

Yet resistance to the deal is seen as a signal that the global bond rally that has driven debt costs to all-time lows for governments, including Ireland's, may have reached its limits.

The cost to Germany of borrowing sets the bar for debt costs across the euro area, including for Ireland.

Head of money markets at Bank of Ireland, Pat Byrne, said the German deal was the first ever 30-year bond with a negative yield (-0.11pc), meaning in effect it costs investors to hold the bonds.

"The broader conclusion is that this is an ominous sign for cash bonds (bond prices)," according to Antoine Bouvet, a rates strategist at ING.

More than $16trn (€14.4trn) of debt around the world has a negative yield, a unique situation. Yields turn negative when demand for bonds pushes prices so high that the cost of owning the asset cancels out the interest.

Bondholders have been willing to take that hit on shorter-term bonds - betting that the value of the asset will hold up better than cash or other safe assets in a low inflation environment. But the duration of the German bond pushed that logic too far for many. "It is technically a failed auction," said Jens Peter Sorensen, chief analyst at Danske Bank.

In the case of the German bond yesterday, the interest rate was set at zero. Ireland's 10-year government bonds were yielding less than zero on the market yesterday, but this country has not issued long-term bonds with negative returns.

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Investors who hold the zero-interest German 30-year bonds will have no income, or capital repayments, until the debt matures in 2050. There were signs ahead of yesterday's deal that bond market investors - who generally manage money conservatively for the likes of pension funds and insurance companies - were at the limits of their tolerance.

US giant Pimco, the world's biggest bond investor, said this week that it had reduced its holdings of government bonds, fearing prices at all-time highs could tumble if a breakthrough in US-China trade was to suddenly boost global appetite for riskier investments.

Pimco's chief investment officer Dan Ivascyn told the 'Financial Times' newspaper that he still thinks bond yields will remain relatively low, but that a trade agreement between the US and China could trigger a powerful snapback in yields, if it sparked greater optimism on the markets - which would in turn drive selling of low-risk bonds.

The effect of that would be higher debt costs, including for governments, something NTMA chief executive Conor O'Kelly has warned about.

Set against that is the expectation the European Central Bank will introduce further monetary stimulus next month - flooding cash into the bond markets that could further drive up demand and drive down yields.


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