This Is Your Bond Market. This Is Your Bond Market On Fedroids... And Germany Goes Zero Coupon

Tyler Durden's picture

The following chart from Dylan Grice does a good job of demonstrating, once and for all, what is going on in the bond market.

And speaking of bond markets, a few hours ago the German debt agency announced that it will for the first time ever, issue zero coupon 2 year bonds, which as the name implies will pay zero cash interest. In other words, Germany, sick and tired of being the only good cash collateral in Europe, is gradually halting the payment of any cash interest on its paper. After all: why should it?

Germany will for the first time sell two-year bonds on Wednesday that won't make scheduled interest rate payments, a ringing endorsement of the safe appeal of German debt and a reflection of increased market nervousness over the composition and direction of the euro zone.

 

The German federal government Tuesday set a zero coupon on a new issue of two-year federal Treasury notes, or Schatz. Germany will auction €5 billion ($6.41 billion) of the two-year note on Wednesday.

 

While other countries have sold zero-coupon bonds in the past, these offerings were designed as such to meet demand from a certain group of investors rather than being a reflection of a country's slumping borrowing costs.

 

In contrast, a zero coupon on the new German note underscores a surge for safety, which has pushed yields on bonds perceived to be safe sharply lower. Investors are so nervous about the potential loss of capital that they are willing to forego interest rate payments just to protect their money by parking their funds in German debt.

Coming soon to a market near you: negative interest bonds, where one pays the government for the privilege of holding repoable collateral. This is not a joke.

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hedgeless_horseman's picture

 

 

How does one say, "Fuck you Grandma!" in zee German?

hedgeless_horseman's picture

 

 

Sorry, but that is incorrect. 

The correct answer is, "Vee are halting zee payment of any cash interest on zee Rheinpaper."

Oh regional Indian's picture

So basically anyone buying these bonds is doing so because of some twisted hedging requirement? 

Everytime I see this, the good Doctor Fekete floats up in my minds eye saying, see? 

And if theoretically, yields can even be negative, it seriously says something about backwardation in the liquid currency market complex, eh?

ori

smorgasboard

NotApplicable's picture

Can a brother get a ZIRP?

 

"Lend me your money for nothing, or else!"

Trimmed Hedge's picture

Actually, I've been using 0% credit cardz for years now.

You know the drill... Load up a card at 0% (no fees), pay only the monthly minimum, then right before the intro APR expires (usually 12-18 months), pay it off in full.

Wash, rinse, repeat.

In the meantime, do whatever u like with your no-cost float...

NotApplicable's picture

At least that's an actual gamble for the issuer as they might earn some interest if you screw up.

I wonder at what point will MSFT and the other cash flush corps turn into full blown financials borrowing for next to nothing only because it the best return then can get in a dying economy.

Once this curve flattens, then we'll know we've made it fully into Bizarro World.

http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=MSFT

idea_hamster's picture

"MSFT and the other cash flush corps turn into full blown financials "

Worked for GE.  Wait ... wut?

malikai's picture

I cant wait to open up the discount window for Banco de Gates.

mayhem_korner's picture

@ Trimmed Hedge

 

You might check your credit score before you conclude that it is truly 'no-cost'...

Trimmed Hedge's picture

As long as mama keeps gettin' her crack, she don't give no damm 'bout no bogus cartel-given score.

Honestly, my credit score is fine. And if it weren't, they prolly wouldn't be givin' me these free loans all these years.

 

P.S. I forgot to mention in my original post that I close most of the cards after I pay 'em off...

mayhem_korner's picture

Honestly, my credit score is fine. And if it weren't, they prolly wouldn't be givin' me these free loans all these years.

 

You just summed up the housing bubble in twenty-two words. 

Trimmed Hedge's picture

Big diff is, I ain't taking out hundreds of thousands of dollars at a time to buy an overvalued asset that's bound to grind down for years & years.

I ain't stoopit.

But, to each his/her own. If peepz don't want to participate in the 0% credit card game, no skin off my back. It is out there though should one desire.

FYI, my credit score is in the high 700s.

Eireann go Brach's picture

Trimmed Hedge, do you love Obama?

Thamesford's picture

"It's patriotic!" - Josef Von Biden

CrimsonAvenger's picture

See, that's what I love about ZH. Two people know how to tell their grandmothers to fuck off in another language.

whatsinaname's picture

Speaking of Grandmas, one literally went over the edge in a high end Detroit suburb yesterday. Sad story of our times ?

Cognitive Dissonance's picture

"Coming soon to a market near you: negative interest bonds, where one pays the government for the privilege of holding repoable collateral. This is not a joke."

I'll stick with my Gold and Silver. But thanks for playing anyway.

fuu's picture

Some repo desk jockeys don't approve of your plan.

youngman's picture

Actually they would not have to raise taxes if they could get a big enough negative bond....say to the minus of 15%.....you could get rid of some debt that way...

jus_lite_reading's picture

GEEZUS! 

If people can't see what this is implying then they deserve to lose all!!

zero coupon bonds = imminent failure expected

Red Raspberry's picture

How much is your money worth if you loan it out for nothing???????

StychoKiller's picture

Munny (FRNs,Zeuros, etc) != MONEY

Lost My Shorts's picture

Zero-coupon does not inherently mean no return on your money.  They are auctioned, and might sell for a discount to the face value.  Or not, depends on the situation.  The difference is, you get all your return at the end, instead of a periodic interest payment.  Even junk bonds could in theory be zero coupon and sell at huge discount to face (if anyone would buy them).

Pool Shark's picture

 

 

Surprised it took this long in the thread for someone to point out what "Zero Coupon" actually means...

"You keep using that word, I do not think it means what you think it means."

Matt's picture

Not neccessarily. If Germany issues zero interest bonds (not at 0.00% but non-yielding) people can still make money if the bonds increase in value, because the bond still yields zero, not negative rates.

This could work as a de facto Deutsche Mark, while still using Euros. Even if they had bonds with negative yields, it would give people a two-tiered Euro effect.

Germany gets all the cash inflows from the periphery, has zero interest on its own bonds, but people still make money selling no-yield bonds at higher prices to other people. It has negative rates, real or even nominal, on general "Eurobonds" used as a transfer-payment mechanism to support the rest of the Eurozone.

Germany benefits from having a weak currency that is the same as all the other countries, so their exports are not expensive, plus they get to rollover all their debt at zero interest. The other countries benefit with the transfer payments making up their revenue shortfalls, so they don't collapse and can keep buying German-made goods.

barliman's picture

 

Close, but too optimistic ...

... of an overall answer. Germany, at this point, could issue long dated bonds at 0% interest. Why not 10 year bunds at 0%? There would be enough of a market for them.

Germany selling 0% bonds is the exclamation point at the end of the EU/euro experiment.

It says Germany no longer cares what the spread between its bunds of any denomination and the same period bonds of its "partners" in the EU turns out to be.

This is the financial middle finger in response to the "growth" agenda being put forward by the broke countries of the EU and the financial idiot that is the TOTUS.

"Germany benefits from having a weak currency that is the same as all the other countries, so their exports are not expensive, plus they get to rollover all their debt at zero interest. The other countries benefit with the transfer payments making up their revenue shortfalls, so they don't collapse and can keep buying German-made goods."

This is a one way cash flow process towards Germany. It leaves the other EU countries in a worse position trying to sell their debt. It invites further explosion in the other EU's countries interest payments because it is an open statement to the bond markets, "We ALL know these other countries are doomed under the current arrangement."

barliman

truont's picture

Coming soon to a market near you: negative interest bonds, where one pays the government for the privilege of holding repoable collateral.

We effectively have this now.  If inflation is greater than the interest paid on bonds, you effectively have a negative real interest bond.

Janet Yellen loves this idea, to spur spending.  Benron loves it because it spurs risk asset buying (SP500 & AAPL).

WonderDawg's picture

That was my first thought. Doing their damndest to funnel money back into risk assets.

Tyler Durden's picture

It's one thing to have negative real rates: after all only 0.2% of the population understands how inflation works. Nominal negative rates however will be grasped by everyone instantly.

NotApplicable's picture

It doesn't take a genius to understand the incoherence of money for nothing.

That ain't workin...

idea_hamster's picture

"Nominal negative rates however will be grasped by everyone instantly."

I dunno, TD -- there's lots of folks with 0% checking accounts paying hefty monthly charges out there.  

I think if they just called it a "safety commission" or a "transaction tax," people would just lumber along.

malikai's picture

It's like asking your rapist if he'd like to go again.

TacticalZen's picture

How will the schepple respond to currency collapse when it arrives? And why is that event so delayed? o

NotApplicable's picture

The longer they can shake the trees, the more goodies fall out of the weak hands.

mayhem_korner's picture

How will the schepple respond to currency collapse when it arrives? And why is that event so delayed?

 

See 28 Days Later for the answer to both questions.

earleflorida's picture

uber`fuber,... compounded ZIRP interest! Viva Dystopia!!!

PivotalTrades's picture

Might this be the bell being rung at tthe top of that market or do they have to offer 30 year Zeros.

spine001's picture

It is even worse, you are taking a one sided risk. Your German bonds can only go down if interest rates pick up. Lets say that the Germans go along with the Eurobonds, then all zero coupon holders would have lost capital if they need their money back before the two year term.

Why in hell do people do do that? Obviously NOT for the reasons that are public knowledge. Something a lot bigger is at stake that we don't know about. Not even zero hedge.

One sided bets are crazy bets...

Looking forward to conspiracy theories on this one...

Until next time,

Engineer

lolmao500's picture

After all: why should it?

European community? Payback for WW1 and WW2??

Trimmed Hedge's picture

"This is not a joke."

And yet, still quite amusing....

Cognitive Dissonance's picture

Some people are laughing all the way to the bank.

In fact several (TBTF) banks come to mind.

Doubleguns's picture

Zero interest for two years or gold for two years. Seems this would be bullish for gold.