German Federal Bonds: Once a Safe Investment, Now a Risky Bet?

Federal bonds have long been considered a very safe investment. However, for savers, they are currently anything but an attractive investment. The risk of incurring significant losses with these bonds is high. But why is that?

The Former Stars of the Financial World

Federal bonds are generally considered extremely safe. They are highly sought after by investors worldwide as top-tier debt securities. The yield on federal bonds serves as an important indicator of general interest rate trends not only in Germany but throughout the Eurozone. This is because the Federal Republic of Germany is considered one of the safest debtors in the world. Additionally, long-term federal bonds, in particular, traditionally offer good returns.

Historical Yield Development

In April 2024, the yield on ten-year German government bonds averaged around 2.47 percent. Compared to the previous month, this is an increase of about 4.7 percent. In March 2024, the yield was approximately 2.36 percent. In 2023, the average yield on ten-year German government bonds was around 2.46 percent. This marked the first time since 2011 that the annual yield on German government bonds exceeded 2 percent. In the preceding years, there was an almost continuous decline in yields. In the mid-1990s, the yield on German government bonds was still around 6 percent (source: Statista).

What are Government Bonds?

Government bonds are usually medium- to long-term debt securities issued by states. When a government needs financial resources, it places bonds on the capital market. An investor who buys a government bond thus lends money to the government for a previously fixed period and receives interest in return. The amount of interest a state has to pay depends on how its reliability for timely and full repayment is assessed. Countries with high creditworthiness – such as Denmark – can therefore set a significantly lower interest rate than states with poorer credit ratings, like Greece.

The Interaction of Price and Yield

In general: if the stock market price of a federal bond (or any publicly traded debt security) rises, the yield of this security and thus the overall interest rate falls. If the stock market price of a bond falls, its yield rises. This basic principle plays a crucial role in the valuation of bonds.

Why are Federal Bonds Currently So Unattractive and Even Dangerous?

According to Focus magazine, there is already a significant financial gap in the budget planning. Initial estimates suggest that the planned inventory is not sufficient to close the budget deficit. It is estimated that there is a financial gap of 25 billion euros.

Currently, ten-year German bonds offer only a low yield, making them extremely unattractive for savers and private investors. Another reason for this is the inflation rate in Germany. Buying a federal bond with ten years remaining today would diminish larger fortunes and medium-sized savings.

Volatility and Risks

Publicly traded debt securities, including federal bonds, are subject to price fluctuations. Although these are not as severe as with stocks, fluctuations in federal bonds can also pose significant risks for private investors.

Purchasing Government Bonds by the ECB

One monetary policy measure the European Central Bank uses to counter possible deflation is bond-buying programs. For this, the ECB buys government bonds or other securities on a large scale. The aim of these bond purchases is to stimulate economic growth and inflation development in the Eurozone.

The European Central Bank (ECB) could take drastic measures, such as quickly lowering key interest rates or buying back bonds through central banks, which can lead to significant volatility.

Investors Should Be Cautious

Given this background, private investors should be extremely cautious. The once so secure federal bonds are currently a risky investment that must be carefully considered. It remains to be seen how the situation will develop in the coming years and whether federal bonds can return to being a more attractive investment form.