Eurozone Crisis Now Yields Windfall -- Heard On The Street

By Richard Barley
        Greece hasn't been the only topic of conversation among eurozone finance ministers recently. Little noticed among the crisis hoopla, Jeroen Dijsselbloem, who leads the group, noted a discussion the ministers probably relished far more: the possibilities presented by savings from ultralow interest rates.

        Take Germany, the country with the lowest eurozone bond yields. Interest costs have been slashed thanks to ultra-loose global monetary policy and Germany's pre-eminent haven status. The rush into German debt earlier this year sparked by the European Central Bank's quantitative-easing program was just the icing on the cake. Ten-year Bund yields were last above 2% in a sustained way in late 2011; even after the bond selloff of recent weeks, two-year German yields remain buried firmly in negative territory, at minus 0.25%.

        As a result, the summary card for German debt sales in the first half of this year contains some startling features. The yield on short-term bill sales has averaged negative 0.23%. Of the 19 auctions of EUR76 billion in longer-dated notes and bonds that aren't linked to inflation, nine have carried negative yields and 11 have carried zero coupon rates. Germany last issued a two-year note with a nonzero coupon in July 2014; in February and April it sold five-year debt at a negative yield.

        Germany's debt stock has been transformed. Well over half of it pays coupons of 3% or less; some of its 30-year debt pays coupons as low as 2.5%. Over the next year, another EUR90 billion of relatively high coupon debt will mature, and will be replaced with cheaper borrowing given persistent low rates and bond purchases by the ECB.

        The end result is a German interest bill that has fallen even as debt has risen due to the crisis. In 2008, German central government interest payments totaled EUR40.2 billion, data from the Finance Ministry show; as of June, the forecast for 2015 payments is 43% less at EUR23.1 billion.

        Unfortunately, while this is music to a finance minister's ears, it is less palatable for investors. Even after the recent selloff--which has turned German bond returns negative for the first half--yields are still on the floor. Persistently low rates will challenge pension and insurance providers who have guaranteed payouts to investors. That might end up causing future finance ministers headaches.

        Write to Richard Barley at richard.barley@wsj.com

        (END) Dow Jones Newswires

        July 03, 2015 04:45 ET (08:45 GMT)

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