Your regional office
Montreal
1000, Rue de la Gauchetière West, Suite 3100, Montreal - Quebec H3B 4W5Telephone : +1 514 288 8161
Contact usSelect your investor profile:
This content is only for the selected type of investor.
Individual investor?
Bund yields don't herald another Japan
Bund yields have hit new lows. But this doesn't mean Germany is turning Japanese.
Written by
Germany isn't turning Japanese. Which is why the relentless decline in German government bond yields is unjustified.
The yield on 10-year bunds – German government bonds – fell to an all-time low of -0.21 per cent on the last day of May as global markets panicked about US President Donald Trump’s threat to impose tariffs on Mexico. The flight to safety boosted most safe haven assets – US Treasury bonds, Japanese government bonds (JGBs) and gold also rallied.
But the move in bunds was particularly eye-catching, not least because 10-year yields are below their JGB equivalents.
Nor is the German bond market’s strength just a recent phenomenon. During the past decade, 10-year bunds have generated annual returns of around 6 per cent, while 30-year bonds have delivered 11 per cent, against around 10 per cent returns from the German equity market.
All of which makes it unsurprising that investors are increasingly wondering whether bunds have turned Japanese, a crucial question when one considers that over the past 30 years Japanese bonds have outperformed Japanese equities by more than 4 per cent a year, for a cumulative 250 per cent.
Japan’s decades of lacklustre growth, chronic deflation and policymakers’ efforts at jump-starting the economy with quantitative easing underpinned domestic demand for its bonds.
crossing over
10-year German and Japanese government bond yields, %
Source: Bloomberg. Data covers 01.01.1990 - 31.05.2019
But Germany is very different from Japan of the 1990s. It hasn’t seen a bubble in either financial markets nor property prices; its exchange rate is not overvalued; Germany’s bank lending growth is running at a respectable pace of more than 3 per cent, as opposed to Japan’s which contracted by 30 per cent over the decade to 2005; Germany is experiencing 3 per cent wage inflation compared to Japan’s decade of deflating wages; and the necessity to preserve the monetary union has resulted in a very accommodative monetary policy for Germany. By the same token, though it’s hard to see where the next boost for bunds is likely to come from. The market doesn’t expect the European Central Bank to raise rates until 2022 at the earliest.
Bund yields have fallen not because of weak growth but because of a flight to safety from debt-ridden peripheral European economies. Indeed, that’s particularly relevant given that bond yields tend to move in line with nominal GDP growth over the long run. On that measure, bunds are trading at a record 3 percentage points below trend GDP growth, whereas until 2013, JGB yields were above Japan’s growth rate.
It’s true that there are some similarities Germany now with Japan of the 1990s – poor demographics; large current account surplus; the wrong economic paradigm (“fiscal brake” for Germany, “strong yen” for Japan); excess dependence on exports and too great a focus on producing cars and other capital goods. But they still do not justify how far bund yields have fallen.
As a result, bunds have become the most expensive of all major asset classes, with yields standing at 240 basis points below US Treasury bonds and 100 basis points below what appears justified by Germany’s nominal GDP growth. At the same time technicals show that bunds are significantly overbought based on reliable historic metrics.
This is why our strategy unit is underweight euro zone government bonds and why it makes sense to look elsewhere for a fixed income allocation, including US Treasury bonds.
Important legal information
This marketing document is issued by Pictet Asset Management. It is neither directed to, nor intended for distribution or use by any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Only the latest version of the fund’s prospectus, the KIID (Key Investor Information Document), regulations, annual and semi-annual reports may be relied upon as the basis for investment decisions. These documents are available on assetmanagement.pictet.
This document is used for informational purposes only and does not constitute, on Pictet Asset Management part, an offer to buy or sell solicitation or investment advice. It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. The effective evolution of the economic variables and values of the financial markets could be significantly different from the indications communicated in this document.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Pictet Asset Management has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.
The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested. Risk factors are listed in the fund’s prospectus and are not intended to be reproduced in full in this document.
Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares. This marketing material is not intended to be a substitute for the fund’s full documentation or for any information which investors should obtain from their financial intermediaries acting in relation to their investment in the fund or funds mentioned in this document.
EU countries: the relevant entity is Pictet Asset Management (Europe) S.A., 15, avenue J. F. Kennedy, L-1855 Luxembourg
Switzerland: the relevant entity is Pictet Asset Management SA , 60 Route des Acacias – 1211 Geneva 73
Hong Kong: this material has not been reviewed by the Securities and Futures Commission or any other regulatory authority. The issuer of this material is Pictet Asset Management (Hong Kong) Limited.
Singapore: this material is issued by Pictet Asset Management (Singapore) Pte Ltd. This material is intended only for institutional and accredited investors and it has not been reviewed by the Monetary Authority of Singapore.
For Australian investors, Pictet Asset Management Limited (ARBN 121 228 957) is exempt from the requirement to hold an Australian financial services license, under the Corporations Act 2001.
For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.
For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.
Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).
In Canada Pictet AM Inc. is registered as Portfolio Manager authorised to conduct marketing activities on behalf of Pictet AM Ltd and Pictet AM SA. In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.