The yield curve is a curve showing several yields or interest rates across different contract lengths for bonds, ranging from short-term periods such as 1 year, to medium-term periods such as 10-year and up to long-term periods such as a 30-year bond.
The government bond yield reflects the rate of return investors will get investing in bonds issued by the government, and in general the main yield curve is upward sloping, meaning that the return or yield the investors will receive is higher as the time horizon is also higher until the maturity of the bonds. There is an inverse relationship between the price of the bonds and their yield, so if prices or the bonds increase then their yield rate declines. For a robust economy such as Germany, the government bond yield is expected to have an upward slope.
There is the case of an inverted yield curve when long-term yields fall below short-term yields. This is negative for the economy suggesting that investors believe that the economic will decline in the future. Extreme figures for government bond yields indicate a pessimism of investors and poor prospects for the economy, and in eras of political risks government yields tend to rise significantly as investors tend to sell the bonds.
The current German government bond yield curve is as follows:
- Germany Bund 2 Year Yield is -0.62%
- Germany Bund 5 Year Yield is -0.15%
- Germany Bund 10 Year Yield is 0.56%
- Germany Bund 30 Year Yield is 1.32%
The negative German government bond yield curve for the 2-year and 5-year bonds indicates that these bonds are selling at a premium relative to their face values and investors will lose money holding them until their maturity, as they do not offer also any coupon. The government bond yields in Germany change according to the supply/demand for the bonds, but they also reflect the investor’s sentiment about inflation, interest rates and current, future economic conditions.