The bright side of Bund yields

This is an audio transcript of the FT News Briefing podcast episode: The bright side of Bund yields

Marc Filippino
Good morning from the Financial Times. Today is Friday, January 21st, and this is your FT News Briefing.

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The Fed is finally willing to talk about a digital currency, and German bond yields popped above zero this week.

Katie Martin
I know you have your treasuries and you think they’re kind of important in the States. In Europe, it’s all about Bunds.

Marc Filippino
The FT’s Katie Martin will explain. And China’s Luckin Coffee was booted off the Nasdaq a couple of years ago, but it is brewing a comeback. I’m Marc Filippino and here’s the news you need to start your day.

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The Federal Reserve has for the first time launched a public debate about the possibility of a central bank digital currency. It’s trying to keep up with global financial innovation and maintain the dollar’s supremacy. China is already piloting a digital renminbi, and Europe’s central bank is moving forward with similar plans. Yesterday, the Fed released a lengthy paper that’s expected to be the basis of a heated debate. In the paper, the Fed said a central bank digital currency could provide a safe digital payment option for households and businesses. But there may also be downsides.

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Russia’s central bank has proposed a ban on cryptocurrency. We’re going to talk about that in our Friday market round-up. But first, the German Bund did something interesting this week. Yields on Germany’s 10-year government bond swung above zero for the first time in a long time. We’ll find out what’s going on with our markets editor, Katie Martin. She joins me now. Hey, Katie.

Katie Martin
Hey, how are you doing?

Marc Filippino
I’m doing well. So, Katie, let’s talk about the bond market first. How important is the bond market and what does it tell us?

Katie Martin
Bunds are super important. I know you have your Treasuries and you think they’re kind of important in the States.

Marc Filippino
They’re, you know, a little bit, you know.

Katie Martin
I’ll hand it to you. They’re quite important. In Europe, it’s all about Bunds. It’s all about where the 10-year German yield is, and for the longest time, it’s been below zero. So you’ve had negative yields on the continent’s most important debt benchmark, which is kind of crazy, but we’ve all got used to it because it’s been this way for such a long time. We first saw Bund yields at this maturity dip below zero around the time when the European Central Bank first introduced asset purchase schemes. And then Covid came along. There was just no possibility of yields getting back up, and that just means that the returns on this debt are so tiny and the price of that debt is so high that if you buy it, then you’re guaranteed a nominal loss if you hold it to maturity. And still people queue around the block to buy this debt that they know they will lose money on because they will get their money back.

Marc Filippino
So it’s reliable. OK. Why are investors now asking Berlin to pay them to lend the government their money?

Katie Martin
I know the audacity of it, right? So this all stems back to really the only thing that sets any asset price anywhere on the planet at the moment, which is the Fed. It’s the Federal Reserve. It’s US interest rates, and something has really changed in terms of market expectations around how aggressive the Fed is going to have to be here because we keep getting these toppy inflation readings. And so this is like pushed up Treasury yields in the States and that has dragged bond yields up with it too. And if you look at the performance of crypto, it just had a bad start to the year and hasn’t managed to pick itself up again. You look at the more speculative end of the US tech stocks market that’s been having a really bad year so far. The very tech-heavy Nasdaq index in the states was in correction territory earlier this week, which means it was down 10 per cent from its recent peak. So the market is really saying, OK, this is actually real. The Fed is actually doing this. We’re going to have to scramble. And you know, these scenes, like the bond yields popping up above zero, even if it was only briefly, this is very much part of that volatility. It’s a much more difficult market for people to navigate this year than it was last.

Marc Filippino
So that’s significant in terms of the market, but what about central bank policy? Is this likely? Is the Bund popping above zero? Will it affect how the European Central Bank dictates its policy?

Katie Martin
It still feels unlikely that the European Central Bank will be bumped into moving earlier than it wants to, and, you know, it keeps a very close eye on not just bond yields, but how they relate to all the other bits of the eurozone government bond market. And if it starts to see spreads widening out, you know, gaps between those two markets widening out, it would get alarmed about that. It might express some alarm that this rise in bond yields is making it net more expensive for companies to borrow, which is slightly out of whack with the health of the European economy. So I find it unlikely at this stage to think that it will get bumped into any sort of early move. We’ll have to see what they say at the next meeting.

Marc Filippino
Let’s move to Russia now. The country’s central bank said that it wants to outlaw cryptocurrency mining and trading. Real quick, how come?

Katie Martin
It has said in a report this out this week that it wants to, as you say, stop mining and stop the use of cryptocurrency. And one of the really interesting words that it used in this big report that it put out on crypto is that it has characteristics of financial pyramids. This is pretty explosive language for Russia because in the early 90s, a lot of ordinary citizens lost everything in pyramid schemes. This is something that will really resonate, I think, with people there. It’s only a proposed ban at this stage, but it’s a pretty big deal. This is one of the biggest countries for mining of cryptocurrencies. It’s very energy-intensive. This is definitely a big deal for the market and a big signal also to Russians that, you know, we don’t think this is something you should be going into with your eyes shut. You need to understand the risks that are present here. We’re actually seeing this all across Europe at the moment. UK, Spain, all over the place. Authorities are really ramping up the warnings on consumer protection.

Marc Filippino
Katie Martin is our markets editor. Thanks, Katie.

Katie Martin
No problem.

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Marc Filippino
Luckin Coffee is exploring a comeback. The Chinese coffee chain was booted off the Nasdaq a couple of years ago after an accounting scandal. The FT’s China correspondent, Eleanor Olcott, found out about the company’s plans to relist.

Eleanor Olcott
I was completely taken aback. It didn’t make any sense to me. It was such a huge scandal two years ago. But actually, the more I looked into it and also looked at the business model in China, it started to make more sense.

Marc Filippino
Eleanor says the company has all new management now, and coffee consumption in China is growing fast, which could explain its craving for more investment.

Eleanor Olcott
Currently, Luckin Coffee is trading over-the-counter, which means that only specialised investors can access the shares and invest in the shares. They want to transfer back on to the centralised exchange, which means that they’d have access to much more capital. Luckin is clearly looking to continue expanding, continuing, growing in China and accessing that US capital, global capital would be helpful for those growth plans.

Marc Filippino
And she says Luckin’s accounting scandal and its delisting was never a big deal in China the way it was in the US.

Eleanor Olcott
This was really a story of two sides. I mean, in the US, I mean, it was never really selling its coffee amongst US investors. Obviously, Luckin’s reputation was damaged by the accounting scandal. But in China, consumers carried on drinking its coffee. I mean, the only thing that really changed from their perspective was quite a few of the stores were closed and they had to stop with these aggressive marketing techniques and subsidies. But they’ve changed their business model. And yeah, I mean, they’ve they’ve carried on operating and in China. And I think that’s why this story was so surprising. We haven’t really heard any news in the West about Luckin Coffee effect for two years. But they’re still going, and they’re looking for a way to come back on to the capital markets in the US.

Marc Filippino
Eleanor Olcott is the FT’s China correspondent.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back next week for the latest business news. The FT News Briefing is produced by Fiona Symon and me, Marc Filippino. Our editor is Jess Smith. We had help this week from Josh Gabert-Doyon, Joanna Kao, Peter Barber and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s global head of audio, and our theme song is by Metaphor Music.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.