GERMANY´S CRISIS BENEFIT / THE WALL STREET JOURNAL ( RECOMMENDED READING )

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NOVEMBER 7, 2011, 10:49 A.M. ET

Germany's Crisis Benefit

By RICHARD BARLEY

Not everyone is a loser in the euro-zone debt crisis. The enthusiasm for all things German in the fixed-income world is palpable. That is delivering a major payoff for Europe's biggest economy.

Germany Monday issued a six-month bill at an all-time low yield of just 0.08%, and its 10-year bonds are at 1.8%, also close to a record low. The federal budget deficit for 2011 is set to be below €25 billion ($34.48 billion), or around 1% of gross domestic product, versus a planned €48.4 billion; low borrowing costs will only be a help in balancing the books. Germany is benefitting indirectly from European Central Bank bond buying as its purchases of peripheral bonds leave sellers with cash to redeploy into bunds.

German-guaranteed borrowers are also winners. Yields on German state development bank KfW have traditionally been joined at the hip with those of the European Investment Bank, as the two triple-A-rated borrowers issue similarly large volumes of paper. But they have now diverged: KfW's April 2016 bond now yields 1.56% versus 1.96% for the EIB's July 2016 bond. Shockingly, that's despite the fact that the EIB is backed by the whole of the European Union—27 countries.

Germany's federal states too are seeing the benefit. HSBC notes that all five- and 10-year bonds from these issuers yield less than the EIB, the European Union, the European Financial Stability Fund, and the French and Austrian governments.

Of course there's a cloud attached to this glittering silver lining. Like the widening yield gap between France and Germany, these prices suggest that investors are losing faith in European unity. That could cost Germany dear in the long run.