German Debt Yield Goes Below 1% - An Astonishing New Record

Germany just issued €4.1 billion ($5.16 billion) of federal debt in a 10-year bond auction with a yield of 0.93%. That's the first time it's been below 1% ever.

It's an astonishing change. Two decades ago, a German government would have been happy to issue debt with a 5% yield, and until the financial crisis they didn't fall below 3%. The only advanced economy to see yields like these in recent financial history is Japan.

This means Berlin is borrowing incredibly cheaply. So long as inflation averages above 0.93% for the next 10 years, investors are effectively paying the government to hold its debt. That's probably also why the IMF today specifically names Germany as one of the countries that could easily be spending more on infrastructure.

It's also partly a reflection of falling inflation expectations. At just 0.3%, Eurozone inflation is far below the ECB's 5-year target. As investors get increasingly less confident that the central bank will manage to raise inflation in the long-term, lower yields begin to look more attractive, because the value of the money they originally invested will be declining more slowly.

The spread between US and German yields is also widening, as this chart from a BAML research note shows:

And it's likely to get more dramatic, according to BAML's chief investment strategist Michael Hartnett: "This spread will likely widen as the Fed ends QE, and the ECB begins QE. And as rate differentials widen global capital will likely shift accordingly causing tensions via the currency market."