Some weeks of disappointing economic data, and yields of so-called safe-haven sovereign bonds are back down again. In the case of 10-year German Bunds, the Eurozone’s benchmark, yields have even reached zero, as our "Chart of the Week" shows. Buying such a bond today and holding it until maturity will deliver no return for 10 years, even in nominal terms. One will simply get back the principal amount. No wonder that investors have been complaining for years, mourning the good old times when U.S. Treasuries, German Bunds, or British Gilts carried annual coupon rates of 5% and more.
But we believe it would be unwise to consider Bunds as purely buy-and-hold investments. A look at return statistics tells a different story: In 2018, when almost nothing worked in financial markets, 10-year Bunds managed to deliver a positive performance of 2.7% and Treasuries returned 0.9%. In 2019, so far, Bunds produced a performance of 1.8%, and Treasuries 1.9%. In nearly all cases, they have beaten expectations handsomely (including our own, we have to admit).
One must remember that as a matter of arithmetics when yields fall, bond prices go up. The reverse is also true. If yields were to rise, for example because of a rebound in inflation, that would both hurt bond prices and erode the real value of coupons. The price effects are especially pronounced for bonds with longer maturities. Why then, to return to our initial question, might it still make sense to hold German sovereign bonds, now that they have seemingly reached the point of no return? As we have seen, yields can also fall into negative territory, resulting in rising bond prices and positive performance, even in the absence of any coupon income. Hence, even at zero yield, one might still want to hold some bunds, at least for diversification purposes. Doing so has the potential to help stabilize the rest of one's portfolio when the going gets rough, as demonstrated again in late 2018.
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 4/24/19