German Government Debt is Europe’s Surprising Safe-Haven Investment

This week has provided investors with several important developments in Germany that are worth pointing out to show the seriousness of weak economic conditions in Europe.

Germany, with the strongest economy in Europe, issued new bonds Monday, Aug. 13, that are proving to be the ultimate safe-haven investment as buyers accept negative interest rates. The rare phenomenon of a government effectively issuing debt and paying less money than they receive from the bond buyers is even more shocking when you consider that inflation is rising in Germany, which also reported small but positive second-quarter economic growth.

Since institutions led by sophisticated professional investors, along with other governments, often are the buyers of sovereign debt, the situation indicates that the so-called “smart money” is betting that German bonds are one of the most stable places to put money right now. If theft and fire could be completely prevented, putting your money under the mattress would provide better returns than buying German bonds.

Specifically, the yield on Germany’s short-term yield due February 2013 was negative 0.0499%, compared to negative 0.0344% at the government’s previous bond sale on July 9. If you consider the rising negative yield on newly issued German bonds a bellwether, savvy investors are bearish on Europe.

What that situation means for individual investors is that caution is warranted in buying and holding equities, not only in Europe but elsewhere. Here are several reasons for treading carefully, based on this week’s economic developments.
First, the gross domestic product (GDP) of the 17-nation euro zone contracted 0.2% during the second quarter of 2012, according to estimates from Eurostat. The negative growth reflects deterioration from the first quarter, when the euro zone notched flat economic growth, and a continuation of economic slippage that occurred in the fourth quarter of 2011 when the region’s GDP fell 0.3%.

Second, the region’s sustained economic pullback further indicates the strength that Germany is showing as it reported a better-than-expected 0.3% jump in second-quarter GDP, compared to the first quarter. In contrast, France’s second-quarter GDP dipped 0.1%.

With the GDP in France and many other European countries sliding, you can begin to understand why institutional investors are wary about investing in public companies based in those troubled countries or those that generate sizable chunks of their revenues and profits from the region. It also becomes clear why the smart money is concluding that German bonds offer the best of a number of comparatively unappealing short-term investment opportunities.

Third, wholesale prices in Germany increased more than expected in July, according to figures released on Aug. 13 by the country’s Federal Statistical Office. The index of wholesale prices jumped 0.3% in July 2012, compared to June, and jumped 2.0% compared to July 2011.

The news about consumer prices in Germany was slightly better, since that inflation rate held steady. The Consumer prices in Germany rose 0.4% in July 2012, compared to June 2012, and climbed 1.7% from July 2011.
With the situation in Germany showing slow economic growth, negative interest rates on government debt and rising but still modest inflation, investors may be wise to wait until positive signals surface in the weeks and months ahead before going bargain hunting for European-based stocks.

Paul Dykewicz is the editorial director of the Financial Publications Group at Eagle Publishing Inc., of Washington, D.C. Eagle publishes four free investment e-letters, seven weekly trading services and five monthly investment newsletters, Forecasts & Strategies, Successful Investing, High Monthly Income, The Alpha Investor Letter and PowerTrend Profits.