German Government Debt is Europe’s Surprising Safe-Haven Investment

Paul Dykewicz

This week has provided investors with several important developments in Germany that are worth pointing out to show the seriousness of weak economic conditions in Europe.

Germany, with the strongest economy in Europe, issued new bonds Monday, Aug. 13, that are proving to be the ultimate safe-haven investment as buyers accept negative interest rates. The rare phenomenon of a government effectively issuing debt and paying less money than they receive from the bond buyers is even more shocking when you consider that inflation is rising in Germany, which also reported small but positive second-quarter economic growth.

Since institutions led by sophisticated professional investors, along with other governments, often are the buyers of sovereign debt, the situation indicates that the so-called “smart money” is betting that German bonds are one of the most stable places to put money right now. If theft and fire could be completely prevented, putting your money under the mattress would provide better returns than buying German bonds.

Specifically, the yield on Germany’s short-term yield due February 2013 was negative 0.0499%, compared to negative 0.0344% at the government’s previous bond sale on July 9. If you consider the rising negative yield on newly issued German bonds a bellwether, savvy investors are bearish on Europe.

What that situation means for individual investors is that caution is warranted in buying and holding equities, not only in Europe but elsewhere. Here are several reasons for treading carefully, based on this week’s economic developments.
First, the gross domestic product (GDP) of the 17-nation euro zone contracted 0.2% during the second quarter of 2012, according to estimates from Eurostat. The negative growth reflects deterioration from the first quarter, when the euro zone notched flat economic growth, and a continuation of economic slippage that occurred in the fourth quarter of 2011 when the region’s GDP fell 0.3%.

Exclusive  The Global Guru: New Year's Eve in the World's Hottest Stock Market

Second, the region’s sustained economic pullback further indicates the strength that Germany is showing as it reported a better-than-expected 0.3% jump in second-quarter GDP, compared to the first quarter. In contrast, France’s second-quarter GDP dipped 0.1%.

With the GDP in France and many other European countries sliding, you can begin to understand why institutional investors are wary about investing in public companies based in those troubled countries or those that generate sizable chunks of their revenues and profits from the region. It also becomes clear why the smart money is concluding that German bonds offer the best of a number of comparatively unappealing short-term investment opportunities.

Third, wholesale prices in Germany increased more than expected in July, according to figures released on Aug. 13 by the country’s Federal Statistical Office. The index of wholesale prices jumped 0.3% in July 2012, compared to June, and jumped 2.0% compared to July 2011.

The news about consumer prices in Germany was slightly better, since that inflation rate held steady. The Consumer prices in Germany rose 0.4% in July 2012, compared to June 2012, and climbed 1.7% from July 2011.
With the situation in Germany showing slow economic growth, negative interest rates on government debt and rising but still modest inflation, investors may be wise to wait until positive signals surface in the weeks and months ahead before going bargain hunting for European-based stocks.

Paul Dykewicz is the editorial director of the Financial Publications Group at Eagle Publishing Inc., of Washington, D.C. Eagle publishes four free investment e-letters, seven weekly trading services and five monthly investment newsletters, Forecasts & StrategiesSuccessful InvestingHigh Monthly IncomeThe Alpha Investor Letter and PowerTrend Profits.

Like This Article?
Now Get a FREE Special Report:
3 Dividend Plays with Sky-High Returns

This newly-released report by a top-20 living economist details three investments that are your best bets for income and appreciation for the rest of the year and beyond.

Get Access to the Report, 100% FREE


img
previous article

The gold-medal winning, U.S. women's 4 x 100-meter relay team members celebrate with an American flag, after winning in world record time at the London Olympics. I always consider the Olympics an enjoyable diversion from the spectacle of professional sports (football, baseball, basketball, tennis, golf, etc.) and an opportunity to witness the amazing feats of athletes in non-tradition

PREMIUM SERVICES FOR INVESTORS

Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Product Details

LEARN MORE HERE

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Product Details

LEARN MORE HERE

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker,
financial journalist, and money manager. As well as a book author and regular contributor to
numerous investment websites, Jim is the editor of:

Product Details

LEARN MORE HERE

Bob Carlson

Bob Carlson provides independent, objective research covering all the financial issues of retirement and retirement planning. In addition, Bob serves as Chairman of the Board of Trustees of the Fairfax County (VA) Employees’ Retirement System, which has over $2.8 billion in assets.

Product Details

LEARN MORE HERE

Mike Turner

Mike Turner’s financial, mathematical, computer science and engineering background serves as the foundation for his disciplined, rules-based approach to trading. Mike’s three services include:

Product Details

LEARN MORE HERE

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street. Since 2010, Hilary's financial publications have provided stock analysis and investment advice to her subscribers:

Product Details

LEARN MORE HERE

DividendInvestor.com

Used by financial advisors and individual investors all over the world, DividendInvestor.com is the premier provider and one-stop shop for dividend information and research.

Product Details

Popular tools include our proprietary Dividend Calendar, Dividend Calculator, Dividend Score Card, and many more.

LEARN MORE HERE