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We are now definitely entering a period of consequences. Consequences of what? We are yet to know. Germany has auctioned off five-year government bonds at a negative yield for the first time in its history! Putting this simply, the German Government is asking investors to lend them money for five years, after which they will return only part of it back. That is, you have to pay a fee to the German Government to keep your money!

German bond yield. Source: http://www.ft.com/intl/fastft/282943

How does the German Government get away with this? It is not the first time that German bund (German for bond) is traded below 0 percent yield. Since the start of 2015, investors have already sent a message to the German Government that they are ready to buy bund at a negative yield.

So, what does this say about future expectation on the German economy? A short answer is: investors expect the German interest rate to remain near zero for the next five years. As a corollary, they are expecting the Eurozone to enter a deflationary period from which it cannot escape. It also indicates something even more worrying; lower growth expectation.

More of concern is the phrase “for the first time in its history.” Reading through books on economics and finance, it is easy to observe that there is no discussion on negative yield. The upshot is: there is no economic model for it. We are indeed venturing into the unknown here, and that creates opportunities as well as unknown risks.