German and British government bonds have hit unprecedented low levels following concerns about the global economic performance.
Economic Panic Hits Global Bond Market
A bleak global outlook in the economy results into low interest rates and equally low bond yields.
Presently, an increasing number of government issued bonds are yielding returns of less than zero. As a result, there have been speculations that the world may be facing an impending financial market because of company and government debt.
The exceptionally low returns on government bonds can be attributed to low or even negative interest rates set by central banks.
Observers now fear that this trend is already having adverse effects on commercial banks and the situation could possibly worsen if interest rates rise.
Following the financial crisis, governments have been able to borrow very cheaply and it became even cheaper at the start of the New Year.
In Japan and Switzerland, the yield on 10-year borrowing is negative while in Germany it is just above zero for five-year bonds. The situation is the same for Belgium and France whose governments have an extremely large debt burden.
Latvia and Ireland, which were bailed out following the financial crisis, are the also experiencing low yields on government debt.
On two-year bonds, Italy and Spain are also experiencing low bond yields.
When bond yields are low, it is an indication that there are very low chances that the borrower will default.
While none of these countries seem like they may not pay back their debt it is quite surprising that Germany is in the same category as these other countries.
The current situation has resulted to too much negative yield and this is increasingly becoming a problem for investors who depend on government bonds for profit, including bank, insurance companies, investment firms and pension plans.
The current trend is significant because the Eurozone crisis that almost ruined the EU single currency originated from the bond market.