Sometimes, bonds are just priced too expensive, and I think that’s what happened in Germany.
A 1.47 percent yield on a five-year German bund? I’m surprised they snookered a single investor into that deal, let alone finding 6.1 billion euros worth of demand.
Think about the alternatives investors have to choose from out there. The five-year U.S. Treasury is yielding more than 2 percent right now, and given the currency and structural risks with the euro, that strikes me as a much better deal.
I say that despite being bullish on Germany in general, as I mentioned yesterday on CNBC.
But bunds themselves were yielding over 2 percent a month ago. Yields have been pushed down since only by a Eurozone flight-to-quality. One way to read the Germany auction failure is that the flight-to-quality is overdone.
Remember, bond auctions in Portugal and Italy succeeded the same day Germany’s bond auction failed, showing that investors actually wanted to buy risk.
I don’t think everything’s ducky in Germany. They have significant exposure to Greek, Spanish and Portuguese debt – more than a hundred billion dollars worth – and legacy exposure to bad real estate loans. But I just don’t see how “refinancing risk” is truly a concern when yields are priced so low. I think it’s the opposite – investors turning against the “safe haven” pricing of German bunds in favor of riskier issues.
If refinancing risk were really a concern, German bonds would be yielding a heckuva lot more than 1.47 percent.