Low yield coupled with concerns about supply imbalance! The safe-haven glow of German government bonds is gradually fading.

The German government bonds are facing the most intense competition from traditional safe-haven assets such as gold in attracting investor funds. This is due to Germany's fiscal stimulus plans and concerns about supply-demand imbalances possibly pushing up yields following the European Central Bank's reduction in bond holdings. Data from the London Stock Exchange Group shows that during the global financial crisis from May 2008 to May 2009, the US dollar was the standout asset, rising by 14%, followed by the Japanese yen. German government bonds also performed well, rising by nearly 6%, similar to the increase in gold prices. Meanwhile, US Treasury prices remained almost flat, while the Swiss Franc fell by 6%. However, since then, the attractiveness of German government bonds has been declining. Data shows that during the market turmoil caused by the 2020 pandemic and the sell-off of US assets following President Trump's announcement of increased tariffs in April last year, the price increase of German government bonds lagged behind that of gold and the Swiss Franc. Even before this week's surge in oil prices due to Middle East tensions, exacerbating inflation concerns and leading to a sell-off of global government bonds, there were more signs indicating that German government bonds were gradually falling behind in competition with other safe-haven assets. As President Trump repeatedly threatened to annex Greenland and pressured NATO allies to increase defense spending, investors refocused on Germany's fiscal stimulus plans and potential large-scale borrowing, causing German government bonds to further slide in the rankings of safe-haven assets, being surpassed by US Treasury bonds. James Bilson, fixed income strategist at Schroders Global, said, "Any shock that pushes us further towards more fiscal spending could mean that the safe-haven properties of German government bonds may not be as strong as in the past." "Currently, we are slightly underweight on German government bonds, or effectively shorting them relative to UK government bonds, and this is also the case in absolute terms." Analysts point out that German government bonds are among the lowest-yielding bonds in major economies, with the yield of 10-year German government bonds currently around 2.71%. In comparison, the 10-year US Treasury yield is 4.02%, and the UK equivalent is around 4.4%, making German government bonds less attractive to investors seeking higher returns. While economists expect that the fiscal stimulus in Germany's plans will provide a strong boost to the economy, the effects may not be felt until 2027, meaning that economic growth may remain weak for the rest of this year. Meanwhile, some southern European countries, including Spain, continue to grow their GDP and maintain fiscal discipline, leading to credit rating upgrades. Expectations of more joint debt issuance in the EU have also boosted the bonds of highly indebted member countries such as Italy and France. These countries have benefited from various tools set up by the European Central Bank to prevent significant differentiation in borrowing costs among member states. Joint debt issuance will help distribute the debt burden of the eurozone more evenly. These factors have kept the bond yields of related countries close to German levels, limiting the relative performance of German government bonds. Luca Salford, Euro Rates Strategist at Morgan Stanley, said, "What we're seeing in the region is a convergence, which is why during times of crisis, German government bond price increases may not be as pronounced as in the past." He added, "The resumption of quantitative easing is still far away, and from a macro perspective, there are no clear concerns that other countries are facing higher risks than Germany." Furthermore, as the European Central Bank gradually reduces its bond holdings purchased as part of pandemic-era quantitative easing programs, this process has also disproportionately pressured German government bonds, as the largest economy in Europe, Germany's bonds were the largest share of the bond-buying program at the time. Rufaro Chiriseri, Head of Fixed Income at RBC Wealth Management, said, "German government bonds still have safe-haven properties, but after structural changes in the fixed income market, they are competing with other safe-haven assets such as the Swiss Franc and the Japanese yen." She added, "As the European Central Bank is no longer a significant buyer in the bond market, investors who are more sensitive to yields are increasing, which is particularly important for Germany, as around 40% of bond demand still comes from foreign investors outside the eurozone."