The complete history of German bond yields, from Napoleon to Angela Merkel

Matt Phillips

AP Photo

Any given day in the global bond market can be fairly snooze-worthy. Bond yields tick up by a few basis points, and down by a few basis points. Ho-hum. That’s the case today in the market for German government bonds (known as bunds). Yields on the 10-year bund declined by about four basis points, or 0.04 percentage points, to 1.12%. In other words, low.

But in my experience, the best way to make sense of the the bond markets is by looking at a long time series. That’s usually when the noise of a meandering market gives way to a clear signal. You can see that the recent run lower in bund yields—prompted by an easier-sounding European Central Bank, disinflation, and scary developments in Ukraine—has pushed yields down to their lowest level in recent history.

But there’s more. We grabbed estimates of long-term bund yields from data provider Global Financial Data. With the best numbers we have going back to 1815, these are the lowest German bond yields on record. Pretty remarkable.

Now, it’s best to think of these numbers as a broad estimate of interest rates. The benchmark 10-year bund that hit a low today didn’t exist 200 years ago, not least because Germany as we know it today didn’t exist 200 years ago.

Back in 1815, the dominant power in the confederation of German-speaking states, formed that year after the final defeat of Napoleon Bonaparte at Waterloo, was the province of Prussia. So the numbers that start in 1815 in the chart above are estimates based on the yield of Prussian government bonds. German Imperial government bonds were used from the 1870s. Government-backed mortgage bonds began in the 1920s. Bonds issued by Hitler’s Third Reich are the benchmarks for the 1930s and immediately after the war. Through the 1950s and 1960s, a mix of West German government bonds were used. Starting in 1980 the Bundesbank’s constant maturity 10-year bond is used, which is comparable with today’s bond yields.

At any rate, if you’re going to have long-term data series like this in the world of fixed income, a certain amount of stitching and pasting is required.

Also, cutting. You may have noticed the odd gap in the graph around 1920. That’s because I axed the yield data around the hyperinflation of 1922-23, which rendered Germany’s bonds worthless. And it’s not just me. The irreplaceable survey of interest-rate history, the appropriately titled A History of Interest Rates, also leaves those years out. “Unfortunately, no bond yields at all were computed by the sources quoted for the inflation years of 1922 and 1923, no doubt because of the chaotic state of the market and the currency,” the authors wrote. Rates stabilized a bit in 1924, where the series picks up.

The government held yields steady throughout the war years. After the war, yields on West German bonds rose, along with those of most advanced economies (although apples-to-apples comparisons are impossible because of various changes to how the bonds were taxed).

German yields most recently spiked in the 1990s around the time of the reunification. But since then, it’s been pretty much a one-way ride to the record low levels we see today.

OTHER GERMAN GOLD BOND

1. German External Loan 7% 1924 (Dawes)

2. German Reich 5% External Loan of 1930 (Kreuger Loan) Fifty Year Gold Bonds

3 German Government International 5 1/2% Loan of 1930 (Young)

4. Free State of Prussia 6 1/2% Sinking Fund Gold Bonds-External Loan of 1926

5. Free State of Prussia 6% Sinking Fund Gold Bonds-External Loan of 1927

6. General Electric Company 7% Twenty-Year Sinking Fund Gold Debentures 1925

7. General Electric Company 6 1/2% Fifteen-Year Sinking Fund Gold Debentures 1925

8. General Electric Company 6% Twenty-Year Sinking Fund Gold Debentures 1928

9. Bavarian Palatinate Consolidated Cities 7% External Serial Gold Bonds 1926

10. Free State of Bavaria 6 1/2% Serial Gold Bonds 1925

11. Free State of Bavaria 6 1/2% External Twenty Year Sinking Fund Gold Bonds 1925

12. City of Berlin 6 1/2% Twenty-Five year Sinking Fund Gold Bonds 1925

13. City of Berlin 6 % Thirty year External Sinking Fund Gold Bonds 1928

14. Consolidated Hydro-Electric Works of Upper Wurttemberg 7% First Mortgage Thirty-Year Sinking Fund Gold Bonds 1926

15. Brown Coal Industrial Corporation 6 1/2% Sinking Fund Mortgage Gold Bonds Series A 1928

16 State of Bremen 7% Ten Year External Loan Gold Bonds 1925

17 Protestant Church in Germany Welfare Institutions Loan 7% Twenty Year Secured Sinking Fund Gold Bonds 1926

18 German Atlantic Cable Company 7% First Mortgage Twenty-Year Sinking Fund Gold Dollar Bonds 1925

19 Central Bank of German State & Provincial Banks, Inc. 6% First Mortgage Secured Gold Sinking Fund Bonds Series A 1927

20 Central Bank of German State & Provincial Banks, Inc. 6% Mortgage Secured Gold Sinking Fund Bonds Series B 1927

21 German Provincial and Communal Banks Consolidated Agricultural Loan 6 1/2% Secured Sinking Fund Gold Bonds Series A 1928

22 German Central Bank for Agriculture 7% First Lien Gold Farm Loan Sinking Fund Bonds 1925

23 German Central Bank for Agriculture 6% Farm Loan Secured Gold Sinking Fund Bonds 1927

24 German Central Bank for Agriculture 6% Farm Loan Secured Gold Sinking Fund Bonds Second Series of 1927

25 German Central Bank for Agriculture 6% Farm Loan Secured Gold Sinking Fund Bonds Series A of 1928

26 German Consolidated Municipal Loan 7% Sinking Fund Secured Gold Bonds 1926

27 German Consolidated Municipal Loan 6% Sinking Fund Secured Gold Bonds 1927

28 Dortmund Municipal Utilities 6 1/2% Twenty Year Dinking Fund Mortgage Gold Bonds 1928

29 City of Duesseldorf 7% External Series Gold Bonds 1925

30 City of Duisburg 7% Serial Gold Bonds 1925

31 Unterelbe Power & Light Company 6% Twenty Five Year Sinking Fund Mortgage Gold Bonds Series A 1928

32 Electric Power Corporation 6 1/2% First Mortgage Sinking Fund Gold Bonds 1925

33 Electric Power Corporation 6 1/2% First Mortgage Sinking Fund Gold Bonds 1928

34 City of Frankfort-on-Main 7% Serial Gold Bonds External Loan of 1925

35 City of Frankfort-on-Main 6 1/2% Twenty-Five Year Sinking Fund Gold Bonds Municipal External Loan of 1928

36 Municipal Gas & Electric Corporation of Recklinghausen 7% First Mortgage Twenty-Year Sinking Fund Gold Bonds 1927

37 Roman Catholic Church in Bavaria 6 1/2% Twenty-Year Sinking Fund Gold Bonds Series A 1926

38 Berlin Electric Elevated and Underground Railways Company 6 1/2% Thirty YEar First Mortgage Sinking Fund Gold Bonds 1926

39 Gesfurel 6% Sinking Fund Gold Debentures 1927

40 Mannheim and Palatinate Electric Companies 7% Fifteen Year Sinking Fund Mortgage Gold Bonds 1926

41 Good Hope Steel and Iron 7% Twenty Year Sinking Fund Mortgage Gold Bonds 1925

42 Hamburg Elevated Underground and Street Railways 5 1/2% Ten Year Gold Loan 1928

43 State of Hamburg 6% Twenty Year Gold Bonds 1926

44 City of Hanover 7% Ten Year External Convertible Gold Bonds 1929

45 City of Hanover 7% External Sinking Fund Gold Bonds 1929

46 Harpen Mining Corporation 6% Gold Mortgage Bonds of 1929

47 Province of Hanover Harz Water Works 6% Sinking Fund Gold Bonds First Series 1927

48 Province of Hanover Harz Water Works 6 1/2% Sinking Fund Gold Bonds Second Series 1929

49 Ilseder Steel Corporation 6% Gold Mortgage Bonds 1928

50 City of Cologne 6 1/2% Twenty-Five Year Sinking Fund Gold Bonds of 1925

51 Koholyt Corporation 6 1/2% First (Closed) Mortgage Sinking Fund Gold Bonds 1928

52 Municipal Bank of the State of Hessen 7% Serial Gold Bonds 1925

53 Luneburg Power, Light and Waterworks, Ltd. 7% First Mortgage Twenty Year Sinking Fund Gold Bonds 1928

54 Mansfeld Mining and Smelting Company 7% Fifteen-Year (closed) Mortgage Sinking Fund Gold Bonds 1926

55 Miag Mill Machinery Company 7% Closed First Mortgage Thirty Year Sinking Fund Gold Bonds 1926

56 City of Munich 7% Serial Gold Bonds 1925

57 North German Lloyd Bremen 6% Twenty Year Sinking Fund Gold Bonds 1927

58 City of Nuremberg 6% External Twenty-Five Year Sinking Fund Gold Bonds 1927

59 Oberpfalz Electric Power Corp 7% First Mortgage Sinking Fund Gold Bonds 1926

60 Free State of Oldenburg 7% External Serial Gold Bonds

61 Prussian Electric Company 6% Sinking Fund Gold Debentures 1929

62 Rheinelbe Union 7% Twenty-Year Sinking Fund Mortgage Gold Bonds 1926

63 Rhine Westphalia Electric Power Corp 7% Direct Mortgage Gold Bonds 1925

64 Rhine Westphalia Electric Power Corp 6% Consolidated Mortgage Gold Bonds 1928

65 Rhine Westphalia Electric Power Corp 6% Consolidated Mortgage Gold Bonds 1930

66 Rhine Main-Danube Corp 7% Sinking Fund Gold Debentures Series A 1925

67 Roman Catholic Church Welfare Institutions in Germany 7% Twenty-Year Secured Sinking Fund Gold Bonds Series A 1926

68 Ruhr Chemical Corporation 6% Sinking Fund Mortgage Bonds 1928

69 Ruhr Gas Corporation 6 1/2% Secured Sinking Fund Bonds Series A 1928

70 Ruhr Housing Corporation 6 1/2% First Mortgage Sinking Fund Bonds 1928

71 Leonhard Tietz, Inc. 7 1/2% Twenty-Year Mortgage Gold Bonds 1926

72 Consolidated Municipalities of Baden 7% External Sinking Fund Gold Bonds 1926

73 Westphalia United Electric Power Corporation 6% First Mortgage Sinking Fund Gold Bonds Series A 1928

74 United Industrial Corporation 6% Hydro-Electric (closed) Mortgage Sinking Fund Gold Bonds 1925

75 United Industrial Corporation 6 1/2% Sinking Fund Gold Debentures 1926

76 United Steel Works Corporation 6 1/2% 25 Year Sinking Fund Mortgage Gold Bonds Series A 1926

77 United Steel Works Corporation 6 1/2% 25 Year Sinking Fund Mortgage Gold Bonds Series C 1926

78 United Steel Works Corporation 6 1/2% 20 Year Sinking Fund Debentures Series A 1927

79 Vesten Electric Railways Company 7% First Mortgage Twenty Year Sinking Fund Gold Bonds 1927

80 Rhine-Ruhr Water Service Union 6% Twenty-Five Year Sinking Fund External Gold Debentures 1928

81 Housing and Realty Improvement Company 7% First (Closed) Mortgage Twenty Year Sinking Fund Gold Bonds 1926

82 State of Wurttemberg Consolidated Municipal External Loan 7% Serial Gold Bonds 1925

83 City of Heidelberg 7 1/2% External Twenty-Five Year Sinking Fund Gold Bonds 1925

84 Siemens & Halske Stock Corp. 6 1/2% Twenty Five Year Sinking Fund Gold Debenture 1926

85 Siemens & Halske Stock Corp. 6% Participating Debenture Series A 1930

The end of the 19th and the beginning of the 20th-century associates with the time of expansion in demand, the growth of the production capacity and the rise of exports to Germany. This in its turn stimulated the foreign direct investments (FDI) into the economics. Ten countries were considered the major investors, namely: Austria-Hungary, the UK, followed by France, USA, Italy, Russia, Poland (was a part of neighbouring empires), Switzerland, Netherlands, and Czechoslovakia (as a part of Austria-Hungary). Their aim was to get via FDI the access to raw material and to get involved into the production and sales. The preferred methods of investments were via equity stakes, mergers and Greenfield investments. In order to implement the destination analysis of the FDI during this time frame mostly knowledge-capital model is used due to the predominant role of horizontal investments (or market-driven FDI). Moreover, there were found some evidence of the vertical investment structure (known as cost-driven FDI). To be more precise, when there were the wage differences between countries the FDI flows were higher to the low-wage ones. Major factors that influenced FDI were market environment (e.g. tariffs and market opening) and company size. Interestingly, cultural differences or distance between countries did not have a major influence on FDI.

Early 20th century

The merger of four major firms into the Vereinigte Stahlwerke (United Steel Works) in 1926 was modelled on the U.S. Steel corporation in the U.S. The goal was to move beyond the limitations of the old cartel system by incorporating advances simultaneously inside a single corporation. The new company emphasized rationalization of management structures and modernization of the technology; it employed a multi-divisional structure and used return on investment as its measure of success.

By 1913 American and German exports dominated the world steel market, as Britain slipped to third place.

In machinery, iron and steel and other industries, German firms avoided cut-throat competition and instead relied on trade associations. Germany was a world leader because of its prevailing "corporatist mentality", its strong bureaucratic tradition, and the encouragement of the government. These associations regulated competition and allowed small firms to function in the shadow of much larger companies.