Yesterday Germany auctioned a EUR 5bn two-year government bond, commonly known as schatz, at a yield of -0.66%. The previous two-year benchmark traded at an average yield of -0.6592% yesterday. The timing could not have been better as German government bond yields had climbed to their highest levels all month off the back of heavy supply. Despite this, the bond was ~3.3 times oversubscribed, the highest level of demand German bonds have received in over a decade; supported by expectations for the ECB to ramp up their (QE) bond-buying programme at the next policy meeting on June, 4.
As German policymakers have agreed to extend the social distancing measures into the end of June, reports suggest Germany’s government, led by Angela Merkel, is looking to prepare a further fiscal boost. Although the details aren't clear, it looks as though any package will face some criticism. Some are calling for further support of key industries, others strongly feel the entire economic landscape requires support and the idea of helicopter money has been floated, whilst others believe no further stimulus is required and the nation should instead put on the debt brakes, and instead work towards achieving its surplus once again.
Germany has already thrown quite a bit of the kitchen sink at supporting the economy which, like every other economy globally, has taken a coronavirus induced hit; current measures account for roughly 4.5% of 2019 GDP. The positive for Germany is that it can borrow at negative rates for ~30 years (current 30-year benchmark sits around -0.003%); we expect to see further issuance from Germany. Although the country falls into our investable universe due to its AAA rating and 6 star Net Foreign Asset ranking, we wouldn’t buy “expensive”, negative yielding bonds, especially at the shorter-end which is particularly sensitive to negative risk sentiment.