Here's the worst news out of the euro zone in at least a day. For the first time, Germany can now borrow for free for two years at a time.
The chart below shows the yield on Germany's two-year bonds. It's admittedly hard to make out because the numbers are so small, but here's the story. After peaking at around 1.7 percent last summer, Germany's two-year borrowing costs have now dropped to around 0.06 percent. And they're set to go all the way down to zero soon.
That's right: Investors are willing to lend to the German government for two years in return for nothing. And that's before inflation.
Some context: the U.S. pays 0.29 percent and Japan pays 0.10 percent on their two-year bonds. That raises two questions: Why are investors willing to lend for basically nothing to most major governments, and why are Germany's borrowing costs even lower than everyone else's?
On the first question, there's been a proverbial flight to safety in government debt. With the global economy still looking shaky, investors care more about preserving capital than growing it. So they pile into government bonds despite negligible yields. That way, they at least won't lose their money. But there's a caveat: Investors only like bonds from countries that control their own currencies. That's because those countries have the policy flexibility to avoid an economic death spiral if things get worse. Implicit here is the idea that Germany more or less controls the euro, while countries like Spain and Italy do not.
But why are Germany's borrowing costs lower than those of other industrial nations? In three words: the euro crisis. It's not just about a flight to safety. It's also about a flight to collateral. German bonds have gained while most other European bonds have tanked. That makes German bonds especially valuable as collateral at the European Central Bank. Hence, greater demand. But even that isn't the full story. There's also a "call option" embedded in German bonds (Roughly speaking, that means a bet that it will increase in price). Here's what that means in English: If the euro does completely unravel, the German mark will come back. And the new mark will be worth a good deal more than the euro. Since German bonds will presumably be redenominated into marks, investors holding those bonds stand to gain a windfall.
In other words, Germany can borrow for free because investors are worried about the euro crisis -- and they're worried it could become far worse. Just about the only positive is that now would be a pretty great time for Germany to borrow some money and spend it -- if they'd give up their austerity delusions.
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Matthew O'Brien is a former senior associate editor at The Atlantic.