Investors are, in effect, paying half a dozen countries for the privilege of lending them money in the short term following the recent European Central Bank rate cut and a flight by investors to perceived havens.
The fall in short-term bond yields highlights the dislocations caused by the crisis and the ECB’s move this month to stop paying interest on deposits at the central bank.
The six countries with negative yields for government bonds maturing in two years or less are Germany, Finland, Denmark, Switzerland, the Netherlands and, most recently, Austria.
Switzerland’s two-year bond yield is the lowest of the six, at minus 0.55 percent, while Austria’s comparable government bond yield edged down to a negative 0.01 percent on Tuesday.
France’s two-year borrowing costs are also close to falling below zero.
Belgium and the European Financial Stability Facility , one of the EU’s rescue vehicles, also managed to sell shorter-term bills at a negative yield for the first time on Tuesday.
“The recent rally in short-term yields is largely a result of the ECB rate cut,” said Richard Ford, head of European fixed income at Morgan Stanley Investment Management.
“It’s created a grab for yield in an already low-yield environment.”
Longer term bond yields have been below inflation rates, or negative in real terms, in countries including the U.S., the UK and Germany for some time.
In contrast, countries such as Italy and Spain suffer from elevated borrowing costs.
“It’s another symptom of the big divergence in investor sentiment between north and south Europe,” said a senior banker.
Investors say the divergence was a product of both the euro zone crisis and the dismal economic outlook — causing a ‘flight to safety’ — but also reflected the possibility of currency appreciation for some assets.
If the euro area unravels, German bonds would be redenominated into a stronger Deutschmark, for example. This is also the case in non-euro zone Switzerland and Denmark.
The former has set a floor for the Swiss franc against the euro, while the latter has pegged the Danish kroneto the euro.
Some investors are betting that such moves could cause an immediate currency appreciation. “Some of the flow into haven assets is not just to keep money safe, it’s also a currency play,” said David Jacob, chief investment officer at Henderson Global Investors.
“You can handle a slight negative return if you might get a significant currency appreciation in some of these countries.”