Savers who want to invest money are finding it increasingly difficult to find a lucrative and at the same time safe investment. Until now, conservative investors still considered government bonds to be safe and reasonably profitable. However, if one looks at the development this year, an alarming picture emerges.
The current yield on German government bonds showed a consistently negative trend, falling by 70% from 1.65% to 0.51% in the period from January 2014 to today. If the forecasts of many financial experts are to be believed, a further drop in the current yield to below 0.5% is imminent as a result of the low interest rate policy of the European Central Bank (ECB).
The current yield as an indicator of the interest rate level
The term current yield is often heard and low current yield is considered a bad sign, especially for savers. But what does this term from the financial world actually mean??
The current yield, also known as the secondary market yield, is a measure of the yield on securities with a first-class credit rating, i.e., securities that carry little to no investment risk. Among the best-known securities of this type are fixed-interest bonds in the form of government bonds. Here the state guarantees a fixed interest rate, which is always paid regardless of the economic development. In addition to government bonds, some other forms of investment, such as Pfandbriefe as bank bonds or corporate bonds with fixed yield promise, offer the same guarantee.
The current yield is the average value from the yields of all securities of this category and is considered as a relevant indicator for the interest level. Life insurers, for example, are forced to base their guaranteed interest rates on the current yield, and most other interest rates, such as those for call money accounts, Riester pensions, construction loans, all depend directly or indirectly on the current yield rate.
Low current yield and negative interest rates on government bonds
The 70% drop in the current yield mentioned at the beginning is alarming in itself. However, if you consider that this is just an average value, it quickly becomes clear that some values have to perform even significantly worse.
This is also the case, because especially German government bonds with shorter maturities of up to four years currently even have negative interest rates. This means that if the government takes out a loan over four years, it will actually have to pay back less than it actually borrowed. Even bonds with a longer term cost the German government currently only 0.6% interest.
Compared with ten-year Japanese or Swiss government bonds, which have an average yield of 0.35% or. With an interest rate of 0.26%, German savers seem to be in a better position, but they are the current losers of the ECB's financial policy.
ECB policy costs German savers 70 billion euros
As the financial magazine "Bilanz" reported, citing the president of the Munich-based Ifo Institute for Economic Research, Hans-Werner Sinn, the European Central Bank's low-interest-rate policy is costing German savers around 70 billion euros a year. The European Central Bank has been fighting price declines and a weak economy in Europe with extremely low interest rates. Until now, the means of choice have been a decrease in the prime rate. A year ago, the ECB cut the key interest rate to 0.25%, then to 0.15% in June of this year, and again to 0.05% in September. Now the next step seems to be imminent.
Experts are almost unanimous that the ECB is likely to move to buy government bonds in early 2015. This is likely to cause yields to fall even further and make saving completely unattractive – which is a stated goal of the ECB.
If saving becomes unattractive for people, they will spend their money, as will companies, thus boosting the economy. Companies will invest again. Alfred Roelli, chief investment strategist at Swiss asset manager Pictet, put it in a nutshell: "The central bank wants to use its policy to force people to act in ways they otherwise wouldn't in a recession, that's the calculation".
Other experts, however, currently see the bottom almost reached and hope for the coming year already a slight recovery in interest rates. Alfred Roelli also offers a bit of encouragement, as he also believes that the bottom is almost reached. If there are positive signals from the economy in the near future, there could well be sales of government bonds. This could even lead to a similarly steep curve for the current yield – albeit with the opposite sign.
But first, the next ECB meeting is scheduled for 22.01.2015, at which a decision is expected on the central bank's purchase of government bonds.