The federal government has to pay interest again
Lindner swears by spending discipline
01/19/2022, 06:25 p.m
For the first time in around three years, the state has had to pay money on ten-year federal bonds instead of making a profit as before. This increases the pressure on Finance Minister Lindner. Nevertheless, investors are unlikely to benefit from the positive return.
Thanks to negative interest rates, the German state has long posted profits on debt – investors had to pay more if they borrowed money. Now the state has to pay some money again, at least for ten-year federal bonds. From the point of view of economists, the cracked “zero mark” has more of a symbolic value. On Wednesday, the yield on ten-year Bunds was positive again for the first time in almost three years. It rose to around 0.02 percent in the morning.
It’s the first time since May 2019 that 10-year Bunds have posted a positive yield. The securities are considered trend-setting. Rising inflation is thus having a greater impact on the capital markets.
Federal Finance Minister Christian Lindner has called for greater spending discipline in view of rising yields. “Government debt does not come for free. The development of government bonds reminds us of that,” said the FDP politician. He confirmed the goal of returning to the debt brake in the coming year. “If interest payments increase, then politicians really have to set priorities,” said Lindner. You have to be modest with current consumer spending so that there is scope for investments in future tasks.
Hardly any advantages for investors
For investors, however, the increase is nothing more than a small glimmer of hope. Because minus the inflation of more than five percent in Germany recently, the papers bring in real, i.e. the bottom line, losses. The consequences for borrowers and builders tend to be negative, as capital market interest rates affect the cost of home loans. If federal yields rise, mortgage interest rates usually also rise – albeit starting from a comparatively very low level.
Rising capital market interest rates mean rather bad news for the German state. Because the federal government is financing part of its spending through new debt. If interest rates rise, the burdens rise. However, the state treasury has been relieved considerably for years by the extremely low and sometimes negative interest rates. The effects of the current development on the federal budget should also be limited and should not be too great a burden. Here, too, the financing costs remain cheap after deducting inflation.
The starting point for the rise in interest rates on the capital markets is the USA. There, the Fed is expected to take significant countermeasures in view of the current inflation rate of seven percent. Markets expect the Fed to raise interest rates up to four times this year. Due to the great importance of the US financial markets, interest rates are continuing to rise in many other economies.
The ECB is still keeping its feet still
The ECB, on the other hand, is not yet sending any signals of an imminent rate hike, wrote Thomas Gitzel, chief economist at VP Bank. Therefore, the increase in yields is a matter of longer-dated government bonds. Short-term interest rates remain low because of the ECB course, while longer-term interest rates are going up.
Due to the ECB’s wait-and-see attitude, experts do not expect capital market interest rates to rise sharply in Germany. Bond expert Elmar Völker from Landesbank Baden-Württemberg expects federal yields to follow their US counterparts at a slower pace as long as the monetary watchdogs stick to their basic stance. In the US, the yield on ten-year government bonds is around 1.9 percent due to the Fed’s tightening stance.
The government coffers of other countries in the euro zone and the EU were also significantly relieved by the partially negative interest rates. However, rising interest rates could result in financial difficulties for many of the countries, some of which are highly indebted. On the other hand, from the point of view of the asset manager DWS, which belongs to Deutsche Bank, the prospect of a loose monetary policy by the ECB speaks for itself. “We do not currently expect the market to test their ability to refinance,” commented DWS bond expert Oliver Eichmann.
In addition, there has already been partial mutualisation of public debt in Europe with the Corona Crisis Fund. However, recent interest rate developments could prompt some investors to withdraw capital from more heavily indebted eurozone countries. “Therefore, we are assuming that risk premiums for Italian government bonds will rise moderately over Bunds over the next twelve months.” Italy is one of the most indebted countries in the currency area.