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http://online.wsj.com/article/SB10001424052970204124204577150311730396748.html

Is this as bad as it sounds?

pardon the phrase but if it's true then this is ass bad for the rest of the world. I'm  just saying: german engineering!

That money sure isn't going into investments in the private sector. Does not bode well.

Is there a link that isn't paywalled?

this just means that investors already realize that they will have a loss  -- this is just a way to reduce the damage.

Should invest in Bitcoin instead :D

Couldn't they could just keep their money in a bank account?
Or are they speculating that their bonds will increase in value?

By giving Germany money, they are hoping Germany will be more willing to lend the other European nations enough to keep them afloat.

At which bank? Any could die tomorrow and never pay back a thing. The German government will rather wreak havoc in the financial sector than admitting defeat itself, and it has the power to decide. Possibly, this gives better chances with the government.




This should be the correct explanation.

You can't hold many euros as cash, and putting them onto a bank can mean their immediate destruction in the debt crisis. Euro Forex has crashed already, and will continue that road if they try to escape that way. They don't know where to go. It's a competition who has the least losses.

Given the instability of the EU, one could say that the market values a Euro of book money far below the current value of one Euro. I wouldn't lend money to Germany at 5% interest right now if I could store the value instead. Negative... go figure what that means.

Seems to me it means the investors here don't think they can store the value. That's the part that worries me.

https://webcache.googleusercontent.com/search?q=cache%3Ahttp%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052970204124204577150311730396748.html&ie=utf-8&oe=utf-8

Its the same for the US and UK.

The European Central Bank is pumping loads of money out at merely no interest rate (1% as much as I recall).
The banks taking this money now rush to german state bonds.
Taking http://en.wikipedia.org/wiki/Basel_II (http://en.wikipedia.org/wiki/Basel_II) into the equation makes it easier to understand why.
It is not only european banks want to, they are forced to by legislation.
Not forced explicitely to buy german state bonds. But what else should they do?
Luxembourg is not issuing much, China has stored loads of unreliable USD, gold is by far too expensive, ...

Germans are earning money while borrowing them  :o :o :o :o :o :o

Why does this surprise you?  In an uncertain world, the Germans (and the UK and US) offer certainty that you will get 98% of your money back.  Where else can you get that certainty?

Spot on. You actually will get the money back! ha ha ha

Germany has finally conquered Europe.

That's an observation some have made... After the war, Europe was set up to castrate Germany and keep them from becoming overpowering again. Now it seems the mechanisms designed to do so have given Germany considerable power. Maybe it's inevitable.

This was the first step :P

It's akin to destroying their currency to diminish the burden of existing debts.

It isn't.  They pay low interest because they guarantee that the money is repaid.  In a world where there are very few safe investments, German, UK and US debt are treated as safe harbours.  The money you put in their bonds gets repaid and that's all the investors want.  For better returns, you need to take higher risks.

Germany is not alone in this. Whomever is regarded as a safe harbor will get this benefit. Denmark is also selling Treasury bonds at a negative interest rate.

Just have a look on how banks "create" money. They have to make sure at most 1 out 10 "customers" let them down.

Negative interest rates are clearly a curious concept. Yes, rational agents would rather hold the money instead of lending them out at negative interest rates.


In 500 EUR bills if they have to. The players bidding at these bond auctions are typically banks themselves, and they have a "bank account" that can't possibly go bust: the reserve account with the ECB. It makes little sense for a bank to diminish it's reserves in order to buy negative yield assets.

What I suspect is going on here is that there is a strong sentiment of Euro dissolution, at which point all nations would revert to older national currencies. Of course investors would prefer to own debt denominated in Deutsche Marks than Italian Liras or (gasp!) Drachmas. So I think the negative interest rates arise because players don't have faith in the currency itself - they believe euros will soon become non-fungible and some types of euros, like those held by Germans will be worth more.

Not understandig what others do, does not necessarily mean they are irrational.
Possibly maybe it is just a lack of information.

Its not lack of information.  Investment in AAA bonds is done when you have money that you don't want to take risks with.  Losing 0.5% per year is way preferable to risking losing a lot more.

That's precisely what I said: assuming the agents are rational, let's see what other rational explanation can cover this behavior.
The explanation some posters are giving, present in the original article ("because they are so worried about the potential for big losses elsewhere") makes no sense whatsoever - whoever is writing this does not understand the notions involved.

There is already another explanation given above.
European Banks do not only follow the goddess called greed. They also have to stick to some rules.
One of them is called NSFR (Net Stable Funding Ratio). The money those Banks are spending here is not there own, just borrowed.
(Remember: Banks may spend roughly 10 times the amount they have in their safes.)
But due to european laws (Basel II and Basel III soon to come) they have to spend a certain amount in safe harbours, which are rare these days. Thus the prices run crazy. The loss here has to be covered elsewhere. Which is quite easy, as (not sure on the exact figures) they have 5 times the amount spend on state bonds free for other loans.

So it's as simple as:

• 1. Central banks make up tons of money to "avoid recession"
• 2. Regulation forces banks to place a part of this money in "safe" locations
• 3. Bond yields plummet, some into the negatives

?

Speaking of certainty.In UK,the law says that in the event of a bank going under,the first £85,000 of your money stored (per institution) in a bank account will be protected.If you have more than this,issues arise unless you store the extra money in a different banking institution.Read here for more info: http://www.moneysavingexpert.com/savings/safe-savings

But if you have £850,000, do you want to manage 10 bank accounts with little to no interest, or buy a couple bonds that guarantee 98% of your money?

Is there not a restriction?  That only individuals are covered?  I seem to remember several charities bankrupted and local authority pension plans damaged when IceSave went down in 2008.