Wednesday, May 23, 2012

About Germany Selling Two Year Bonds at No Interest

Brace yourself for idiotic talk about the 2-year German bond sold today. It was a zero-coupon deal. This does not mean that Germany is not paying for the money. The yield was very low 0.07%, but there is a yield.

Zero coupon securities have been issued for decades. They are never sold at par, but at a discount to face value. Thus, a zero coupon with a one-year maturity sold at $95, with a face of $100, would cost a treasury $5, when redeemed at maturity. I can recall long-term zero coupons in the late 1980's issued by the U.S. Treasury that provided yields of over 10%.

Bottom line, zero coupon does not mean, zero yield. Yet, the yappers will be out there saying as much.

Reuters lead paragraph on the German sale is very misleading:
Germany attracted healthy demand from investors wanting to lend to the country on Wednesday despite offering no interest payments at a two-year bond sale, as worries about a Greek euro exit heightened demand for safe-haven assets.
Buried in the story, Reuters does report that the issue will pay 0.07%, but the story never even gives the discount at which the bonds were sold.

From an investment perspective, given that the European Central Banks appears likely to begin a major money printing programming, a two year German instrument yielding 0.07% is not very bright.

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