Reflection. That is the best description of the behavior of the German 10-year interest rate in the period from the beginning of 2018 and the summer of 2019. It was about 2018 basis points above 70 in early 0, but was about 70 basis points in the summer of this year. n 0 basis points below XNUMX.
Interest rates have been steadily rising since the beginning of September. The interest has doubled in 3 months. Interest rates also rebounded considerably in the other euro countries (including France and the Netherlands). Could this increase be the early stages of a return to the Bund's zero limit and then to early 0 levels?
An important reason for the decline in German interest rates is the supply of interest rates. This in turn is because the Bundsbron has virtually dried up for years. Roughly speaking, the supply of bonds increases when the government has a budget deficit. Since 2013, the government in Berlin has reported a budget surplus year after year, a surplus that has even grown every year.
Flight to safety
The Bunds therefore became increasingly scarce. What becomes scarcer also becomes more expensive; especially if demand increases. This happened with government bonds in Germany. Flight to safety, motivated by fear of a recession. Uncertainty about Brexit, tensions between Italy and the European Commission and the trade war between China and the United States came in addition to the demand from institutional investors and the European Central Bank (ECB) with its quantitative easing.
Anyone who wanted to tempt the owners of these Bunds to say goodbye to the paper equivalent of gold would have to dig deep into their pockets. The result: rising prices and falling interest rates. In recent months, the need for that flight to the safe Bundshaven has decreased considerably. If this continues, it will not be surprising if further upward pressure is expected in the coming quarters. Especially now that there are 2 important new elements in the game.
New chairman duo
2020 could easily be the year of political tensions. Not in Italy or France, but in Germany. Normally a beacon of political stability in Europe. Last weekend, the members of the SPD elected Saskia Esken and Norbert Walter-Borjans as the new chairman duo. These two have never been very pleased with the coalition of the SPD with the CDU/CSU, Chancellor Angela Merkel's party.
This means that the chance that the SPD will prematurely pull the plug on the so-called Grosse Koalition (GroKo) is no longer negligible. Even if that does not happen, tensions are to be expected within the GroKo. Immediately after their election, Esken and Walter-Borjans indicated that they wanted to break open the coalition agreement. The source of irritation for the SPD is the pursuit of budget balance, the so-called Schwarze Null policy.
Black Null in the way
The SPD wants to invest more in education, infrastructure and the fight against climate change. The Schwarze Null stands in the way of that. So get on with it. However, if CDU/CSU does not want to change something, then it is up to the Schwarze Null. It is therefore not surprising that some fear that Merkel will not win the next regular elections in 2021. The fact is that neither CDU/CSU nor the SPD will score well in mid-term elections. Both parties were severely punished in almost all regional elections in the past year.
So there is a good chance that the GroKo marriage will last until 2021. But in Germany that means either political uncertainty in 2020 or the return of budget deficits. But an option is also: political uncertainty and budget deficits. Political uncertainty, because the SPD wants to leave a clearer mark on financial and economic policy. CDU/CSU will - as mentioned - oppose this.
Change attitude
A return of budget deficits is expected in the second half of 2020. In recent months, the German government has firmly rejected any proposal to significantly increase spending and/or reduce taxes. It will not be surprising if this attitude changes after the summer of 2020, when officials in Berlin draw up the 2021 budget. A budget that includes more spending and tax cuts is usually what pleases voters in an election year.
Just don't forget that we are talking about Germany, the country where prudent financial policy scores better among voters than a more French-Italian variant. This means that any shortage is limited. However, this already means a landslide for the Bundsmarkt! For the first time in years, the supply of German government bonds is increasing significantly.
30 year reunion
Political uncertainty followed by the first budget deficit in almost a decade. As a result, the German 10-year interest rate could be closer to 3% than the 2020 limit on October 30, 1, when Germany celebrates 0 years of reunification of East and West. Still a very low interest rate, but the change compared to the summer of this year is no less significant.