Governments have been starting to think like enterprises. Corporate treasurers are employed to optimise their companies’ financial affairs, which includes making sure they pay the least possible interest cost on their debt. Absolute rate levels, the state of credit spreads, as well as the shape of the yield curve are the key determinants in how the treasurer manoeuvres in loan and bond markets refinancing liabilities and/or raising new funds.
If, as is the case these days, highly rated corporate issuers manage to fund at historically minuscule or zero cost or even at negative yield despite the addition of their risk premium over government yields, they would logically try to lock in the longest tenor possible. Why would they not? It’s literally free money. Such strategy consequently feeds through the company’s P/L and serves as a boon for earnings. That’s what the finance people are being paid for.
But what about governments? You could argue their funding teams have two hats on. On one hand, it has traditionally also been their jobs to achieve the best funding terms for the taxpayers of their countries. And by extension, their yield curve is the key reference point for any private borrowing. In other words, the better they do, the easier and cheaper fundraising becomes for their own enterprise and individual constituents.
However, isn’t it also the brief of a government to provide its saving community with an opportunity to earn a yield on their risk-free assets? Of course, the inflationary or disinflationary state of the economy matters a lot, but in the end, those institutions that manage vast pension pots for ordinary citizens need something to work with. Else, the population at large will eventually become poorer.
It is a conundrum that particularly Germany has had to deal with. As the ECB has benchmarked its low-interest rate policy on the weakest links within the eurozone and asset purchases been executed accord to the capital key, the German yield curve has firmly been submerged into negative territory, at least out to the 10-year maturity. Even the ultra-long bonds don’t yield any noteworthy returns. The 30-year Bund has been oscillating around the zero yield threshold for two years now.
Berlin’s finance ministry must be bordering on a schizophrenic state. There must be high-fiving as they raise debt and get paid for it. At the same time, it is the very taxpayer and the army of pensioners that predominantly pay the government for it. This clearly can’t be in the eye of the beholder. Compared to their peripheral neighbours who still at least get a smidge for their buck, the Germans are on the hook for not only an elevated tax rate but also for holding their own government’s debt and pay for it.
The solution to this problem would be for Berlin to significantly raise its debt levels to normalise the imbalances in rates and at least bring their constituency back to par with other Europeans. However, even though Germany has extensive needs to modernise its infrastructure in terms of highways, railroads, and broadband, the consistently frugal attitude of governing politicians deprives the country of such badly needed investments and by implication its savers of a yield on their financial assets.
While the debt mountains among the periphery are skyrocketing, the enforced rate convergence across Europe has kept interest costs in check there. German national debt, on the other hand, has flattened off again in recent months after the pandemic-induced increase. Instead, Berlin has opted to dismiss the burden the eurozone’s monetary policies have imposed on its citizens and maximise its own funding position by extending the average maturity on its outstanding debt.
According to the Bundesbank, since the inception of the currency union the average tenor of German Bunds has significantly increased from approx. 5 years to around 8.5 years, a part of the curve that is still in deeply negative yield territory, mind you. So, even if rates were to rise at one point, Germany’s debt servicing costs would increase at crawling speed and with an ever further extensive time lag as the finance ministry continues to get paid for raising longer-dated liabilities.
Not that other European governments don’t go down the same opportunistic path. The artificial rate conversion has given them a chance to raise new long liabilities at unreal yields, so why wouldn’t they? France is the champion by having extended its average debt maturity to almost 9.5 years, and even Italy has elevated its average tenor to 7.5 years. Compare this to America, where the average maturity still hovers around the 5-year mark. Less opportunism there, it seems.
But back to the Germans. They in particular suffer from this most lethal form of expropriation, being denied a yield on retirement investments. Not all of them suffer, to be sure. The wealthy and privileged have long figured out how to play the game. They are benefitting from this anomaly by investing in stocks and property, both of which have hit all-time highs. It is the wider society, however, who in their once imperturbable belief in a virtuous monetary policy never bought a home and saved in deposits and paper.
It is called financial repression, and we know that it usually causes a steeper social curve and millions of losers in previously harmonious societies. There is a reason why populism has been on the rise across the Old Continent, and we probably have not seen the end of it. The German population is still sleeping at the wheel, more so than their own politicians. No one, not even the rightist AfD, has roused the people to the hard facts of Germany’s Target2 liabilities and the creeping impoverishment of the masses.
