Germany Is About To Sell Zero-Coupon 10 Year Bonds For The First Time Ever

Zero Hedge ^ | July 13, 2016 | Tyler Durden

[Leaning Right]

*snip* According to Bloomberg, on Wednesday morning Germany will sell 10-year bonds with a zero coupon for the first time, as a rally in fixed-income securities pushes investors to forgo annual interest payments in order to hold the safest assets.

[Norseman]

>>They probably will sell at a discount which will determine the yield. Not interest per se but essentially the same.<<

In normal times, you’d be right. Zero-coupon bonds exist and do effectively yield interest, such as the $25 savings bond that matured at $50.

Today, however, in Germany, they might not sell at a discount. In fact, they might well be priced at a premium. If that’s the case, people are effectively treating German government bonds like a safe deposit box to store cash. The premium will be the equivalent of the box rental charge, and paid up front at that.

[Norseman]

>>What is the difference between these and currency?<<

Currency is harder to handle for a large institution investing hundreds of millions of dollars. But you’re essentially correct about the value, and both the currency and the value of the bonds will be influenced by inflation, with one difference. If people decide that inflation is back and will continue, currency will be devalued over time but the value of the bonds could plummet immediately, reflecting the cumulative effect of ten years of inflation.

To illustrate with a 10% inflation rate, feared to be sustained, after a year the currency would buy 90% of what it would purchase initially. The resulting 9-year zero coupon bond, however, priced to yield 10 percent to maturity would be valued at around 42% of face value.

In that outcome, currency would be a far, far, better choice, because you could convert it to goods (or gold/silver) after a year and buy over twice as much as the bond holder selling his bond after a year.

[Norseman]

>>And why would someone buy zero-interest bonds? Deflation?<<

Yes, that’s a rational action if deflation is widely expected. Gold, silver, and other goods and property would decline in value and the bondholder, or holder of cash, could sell the bonds, maybe even at a premium in the case of the bonds, after the deflation event and would end up with more gold, silver, etc., than those who bought before the deflation.

That said, the real reason people are buying German bonds that don’t pay interest, and U.S. Government bonds that will only pay 2.25% a year for thirty years, is that every now and then societies experience their own “tulip mania.” This one is likely to end the same way as all the others, but you never know how high the price of tulips, or bonds in this case, will go before prices plummet back to realistic levels.

In other words, we’re witnessing the madness of crowds, once again.

[TxAg1981]

This makes for the alchemist's dream...turning lead into gold.
Given the right circumstances lead is more valuable than gold.
..hahaha whooda thunk it?

[wildbill]

Far simpler to make room under the mattress.

[Red Badger]

The entirety of civilization is based upon two metals.
The first being gold.
The second being lead................................

[Rebel_Ace]

"The entirety of civilization is based upon two metals.
The first being gold.
The second being lead................................"

Well, unless you are planning on defending your gold by bashing me in the head with a lead club, you are probably going to want to throw IRON in your civilization mix there...

[Red Badger]

.....and maybe some brass....................B^)