Government bonds are no longer boring and predictable

Those who actively follow what is happening in the bond markets may have forgotten that government securities, their pricing, and volatility must be boring. Their mission is to provide a predictable return on capital that investors lend to States. And the change in their yield should not exactly occur in such jumps, as is often seen with corporate bonds. This is probably why the last couple of weeks have been so shocking for investors.

Why investors have “fallen out of love” with German government bonds?

The most” staid ” government bonds in the world are German ones. They have long been considered a safe haven for assets that do not promise investors any surprises. Everything is changing; the yield of bonds that are due to be repaid in 10 years after the issue by the German government jumped from the” starting ” 0.05% immediately to 0.8%. Returns are rising, costs are falling, and investors are counting losses.

No one knows exactly what caused investors to become so massively disillusioned with German bonds and what prompted them to withdraw funds from these securities to others. However, many analysts agree that Central banks ‘ variable rates are to blame. But the quantitative easing program that the ECB has finally started should reduce the number of bonds on the market. Under other stable conditions, the deficit of bonds should have a positive impact on their price. Which could be a source of profit even with zero or even negative returns.

Who will deceive whom?

But in the case of bonds, the so-called “bigger fool” theory worked. Her idea is simple; the investor knows that he is overpaying for bonds and doing it unnecessarily, but hopes that there will always be an even bigger fool willing to pay even more. But when all the bonds were sold out exclusively according to this theory, understanding the situation became the trigger for a sharp reversal.

Perhaps this would not have happened if there had not been such serious changes in the region’s economy. After a sharp jump in oil prices and the publication of business research, an additional factor was the newly emerging signs of impending deflation in Spain. This forced Mario Draghi to decide on a “wholesale” purchase of bonds. And most of all, it was Germany that protested against this program.

But even this could have remained without categorical consequences, if not for the low liquidity of the debt market. Before the financial crisis, the trading platforms of investment banks successfully managed to ensure a two-way movement in the bond market. Now, with tighter regulation, it has become difficult for many investors to find deal partners.

All one to one

And now, looking at the latest statistics and data from the markets, investors are saddened by the times when the government bond market was so boring and reliable. Unlike corporate bonds, government securities have never depreciated so quickly or increased in value before. At the same time, it is still unknown what the ECB’s quantitative easing program will turn into. After all, many questions of interest to investors, the answers were not received.