Eurostat reports that there was roughly €2 trillion of outstanding German government debt at year end 2019. ALL German government bills (Bubills) and bonds (Bunds) have a negative yield, which simply means that bondholders are prepared to pay the German government an annual fee to lend their money to the German Government, be it at -0.65% for very short term debt to -0.52% for 10yr debt to -0.13% for 30 year debt.

Did the yesterday’s German Constitutional Court ruling just change the risk/reward for investors in European government bonds?

The current 10 year Bund yield of -0.52% can be broken down into two components:

+ 0.48% Inflation Breakeven Rate.
- 1.00% Real Yield.

 

Eoin Treacy's view

The German constitutional court’s ruling that central bank purchases are potentially illegal is mostly an internal affair. The extent to which the ECB is subject to German law is highly debatable but pressing that point has political consequences for any country. There remains ample room for legal two-stepping to avoid any official censure which is why the bond market has brushed away any concerns.

Negative real interest rates and the continued weakness of the Euro represent tailwinds for gold. The price broke out to new all-time highs in January and a sustained move below €1400 would be required to begin to question medium-term scope for continued upside.

The price of gold in Pounds originally popped on the upside in 2019, pulled back to the region of the trend mean and broke successfully to new highs in March. A sustained move below £1200 would be required to question medium-term scope for additional upside.

The price of gold in Australian Dollars broke out in early 2019 and continues to trend consistently higher.