Throughout Europe’s financial crisis, German government bonds have been seen as a safe-haven for those seeking protection against the troubles of southern Europe. However, the confidence of financial markets in Germany’s finances may finally be starting to falter as the cost of a festering financial crisis rises – and the country is seen as ultimately holding the bag.
Demand at the latest government bond auction remained solid. However, the slide in German bunds continued into a second day and, worryingly, it was driven in part by worries about contagion after Spain’s poorly-received 100 billion euro bank bailout.
According to Capital Economics:
The last few days have brought clear signs that bunds are finally losing their safe-haven status.
The markets are starting to see bad news for the periphery as bad news for Germany too. If so, there would appear to be scope for this process to continue as the crisis deepens and the fork in the road to either fiscal union or break-up gets nearer.