The European Sovereign Debt Crisis has led to a number of new terms entering the financial lexicon, ranging from concepts like austerity to acronyms like PIIGS. German bunds may have been relatively niche before the crisis, but investors now monitor bund spreads to determine how well eurozone countries are doing relative to its strongest member - Germany.
Bunds & Bund Spreads
German bunds are simply their name for sovereign bonds, similar to Treasuries in the United States. These bunds are commonly sold in two-year, five-year, ten-year and thirty-year increments, as in many other developed Western countries.
The yields paid to investors on these bunds are indicative of financial conditions both in the country and in the eurozone. Investors nervous about the country's future or its future obligations to the eurozone may demand higher returns on their investment and thereby push bond yields higher, while those seeking safe-haven may be willing to accept lower yields.
The difference between the German bund's yields and those of other countries are known as "bund spreads". For example, if Germany's 10-year bunds are yielding 1.3% and Spain's 10-year bonds are yielding 5.5%, then the bund spread with Spain would be 4.2%.
In the eurozone, Germany is seen as the largest and most stable country, which means that its bunds are treated as a standard for comparison. Higher bund spreads are therefore associated with greater risk for the country being compared, while lower bund spreads tend to signify less risk for the country being compared, speaking on broad terms.
Reading into Bund Spreads
Germany's bunds came into focus during the European Sovereign Debt Crisis, since they provided an easy way to calculate performance. Struggling eurozone countries saw their bund spreads widen, as their borrowing costs grew at a faster rate than Germany's. The financial media often references these spreads to highlight countries struggling with yields.
The most popular bund spreads to watch are the 10-year bunds, since they fall between short-term and long-term bonds. But, the duration of the bonds can also provide useful insights into investor sentiment across various time horizons. For instance, short-term bonds may signal that things are fine, but long-term yields increasing could be a sign of trouble ahead.
Finally, investors also watch German bunds themselves (without comparison) to gauge whether or not the market is seeking a safe-haven. For instance, negative yields on the 2-year bunds may suggest short-term investor anxiety. In the case of negative yields, investors are actually paying the country to house their money for fear of loss elsewhere.
Finding & Trading Bund Spreads
Investors looking for access to bund spreads to assist in their analysis of eurozone members can find the information in a variety of places. The most popular place is the Bloomberg Rates & Bonds section, which contains the latest rates for major eurozone economies, as well as several other influential economies around the world for comparison.
Traders looking to make directional bets on bund yields can do so using Eurex's Euro-Bund futures, which represent the benchmark German 10-year bunds. With more than one million contracts traded per day, the derivative is the most dominant contract traded on the Eurex derivatives exchange, as it's the easiest way to bet on German bunds.
In the end, German bunds represent a key element of the eurozone's debt markets, both to compare against other countries and to gauge investor interest.