By Jason Galanis
The nation’s central bank reported, this Tuesday, that they would ‘auction as much as 5 billion euros ($5.79 billion) worth of 5-year government bonds on Wednesday. The annual coupon offered on the bonds will be 0 percent.
Yields for 5-year German government bonds have been trending downward for the past year. As the demand for scarce German bonds rises, the yields fall in response—and that is what has happened to the bond yields. Over the past year, yields have dropped nearly a full percentage point to -0.05 percent.
This will mark the first time investors will purchase 5-year bonds at the prospective 0 percent annual coupon.
The rest of the market may be growing used to near negative to negative yields. Bank of America Merrill Lynch previously reported that as much as ‘a quarter of the 5 trillion euro government bond market pays a negative yield.’ Back in October, they reported at least a ‘tenth of the market paid a negative yield.’
Still, investors responded positively to the proposed auction, and are expected to readily accept the auction’s terms on Wednesday once it commences. Market observers have noted that this may be yet another sign showing that the Euro zone’s bond markets are ‘preparing themselves’ for the European Central Bank‘s prospective bond buying program.
The union’s central bank is expected to announce their plans regarding a prospective stimulus Thursday.
Analysts also expect Germany to play a fairly large role in the sovereign QE program, comprising as much as ‘twenty-five percent (one-fourth) of such a program,’ which would reflect the nation’s contribution to the European Central Bank’s capital base. The central bank’s capital base is based upon its nation’s gross domestic product and population.
Current economic estimates expect the prospective QE program to total as much as 500 billion euros to as much as 1 trillion euros.