Which is worth more — a euro today, or a euro in three decades from the Berlin government? Duh! The latter, obviously. Germany on Wednesday auctions 30-year debt with an interest rate — or coupon, in the jargon — of zero.
Investors will probably pay more than par value for the Bunds, guaranteeing a loss if held until maturity. They will be behaving entirely rationally.
Bond markets boldly go ever deeper into the parallel universe of negative interest rates. The first forays, following the global financial crisis, led to fears of economies falling into black holes. Stars would explode.
Swivel-eyed extraterrestrials would appear in trading rooms. In reality, financial systems coped. Economic theory has been rewritten. Nevertheless, the latest falls in borrowing costs are the reason for broader concern.
Buying longer-dated, negative-yielding debt makes sense for pension and insurance funds matching assets to future liabilities. Paying to lend money to governments is also profitable — if a year later investors pay even more for the privilege.
Thirty-year Bunds bought 12 months ago have generated returns totaling more than 30 percent. Returns on Amazon shares were flat in euro terms over the same period. The German Dax share index lost 5 percent.
Repeating that performance would require a further percentage point fall in 30-year yields, says Bank of America. Scarily, that is not ridiculous. US President Donald Trump wants the US Federal Reserve to slash its benchmark interest rates. Other central banks would have to follow. Global trade wars and Brexit could give them cover.
Supplies of German Bunds are limited, pushing prices up and yields down. Finance minister Olaf Scholz has mooted a €50bn stimulus package to avert a recession, as after the 2008 financial crisis. Even if a fifth of it was funded through 30-year Bunds, their volume would rise by just 4 percent.
The further interest rates fall, however, the less effective they become. Banks that have compensated for the margin squeeze by expanding lending books will hit balance sheet constraints. Charging ordinary customers for deposits will be hard.
They could instead hide cash under mattresses. If the credit impulse fails, central banks will lose credibility.
Chances would rise of a sustained and damaging economic downturn. No one knows when that tipping point will be reached. But negative yields on 30-year Bunds take us one step closer.
