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German Government Bonds/Bunds


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German Government Bonds/Bunds

  1. 1. European Bond MarketBond markets serve to both individual investors & institutional investors. Yet generally majorparticipation is from the institutional investors. To cite an example, European bond markets haveonly 5% of their total investors as individual direct investors, whereas rest of them are theinstitutional investors like insurance companies, banks, pension funds & so on. Although Europeanindividual investors are only 5%, it may vary from country to country. Italy has 20% individualinvestors & in Germany it is 10-15%.Although various European countries have their own government bonds, the European bond markethas started acting as one after the formation of EU. The investors can invest not only in their owncountry’s bonds but also in other EU states’ bonds. Though in order to invest in other countries, thebonds have to be lucrative enough for the investors.The fatal euro crisis has led to a steep rise in the yield of various European countries’ bonds such asGreece, Italy, Spain & so on. This is due to the contagion effect where the failure of one economyeventually led to the fall of other economies like dominoes. The effect is still spreading & there arechances that if it is not controlled it may lead to the collapse of the Euro currency as a whole.BundsGerman bonds, known as Bunds, have a maturity period ranging from 4 years to 30 years. InGermany, the interest is accrued on monthly basis, i.e. each month is treated as having 30 days forthe purpose of calculating accrued interest. The Bunds are considered as a benchmark in Europe,even after the creation of Euro.The German economy is being seen as the strongest economy in the EU currently. Germany isworld’s third largest exporter. The exports account for one third of its national output. The maindrivers for GDP in Germany are service – 70%, Agriculture – 0.9% & Industry – 29.1%. Germany hasabout 60% of its exports to the euro zone.When the yields of various European bonds were increasing due to increasing credit risk, there wasone European country which gained out of it. German government bonds saw an increase in thedemand for its bonds since September 2011. The total value of bonds traded in the market at thattime was around €62.5 billions. Although the newly issued bonds consisted of € 34.5 billions only,the remaining bond trading was from the existing bondholders. The demand for German bondsincreased from all over the world during the euro crisis. What added to the Bunds demand was thedownward rating of several European bonds in the global bond market during this period. Thisincrease in demand was mirrored in the all time low yield of Bunds of 1.7% in 2011 for thebenchmark 10-year Bunds.Effect of Euro Crisis on GermanyGermany suffered a huge drop in their exports due to euro crisis & global economic slowdown. GDPgrowth has slowed down to 0.3% in second quarter of they FY 2012-13. Although the unemployment
  2. 2. rate is 6.8%, it is far better that that in other European countries such as Greece & Spain. Inflation inGermany is seen at 2% which may result in increase in domestic demand.Since it is the only economy with enough surpluses to absorb the debts & further decrease indemand, it is expected to provide for the bailout of Greece. Thus, the pressure is building on theGerman economy that although is being seen as a strong economy, this scenario may not last long.As the surplus is directed for the bailout of European countries like Spain & Greece, it may exhaustmost of its funds & this may lead to the investors turning their backs on the German Bonds. This willlead to a cyclical effect as the yield will increase for the Bunds due to increase in credit risk &Germany may itself become a victim to the contagion of Euro crisis.As this may be after-effects, the future of European Union lies in the hands of the Germans as theydecide to support the Greeks by purchasing the Euro bonds. German Chancellor, Angela Merkel, isfaced by a dilemma whether to go ahead with the buying of Euro Bonds or not. If Germany buys theEuro Bonds in support of Greece’s bailout, it may have to face further economic downturn due todepleting surpluses & this may result in increasing inflation for Germany.