German Deutsche Marks Still in Circulation
A report Wednesday from the Wall Street Journal showed that Germans are still using old Deutsche Marks as legal tender in day-to-day transactions. Germans do not distrust the euro, they merely have a nationalistic pride in the Mark and do not want to lose it.
The Mark was the first symbol of a reunified West Germany after World War II, before there was a flag or a national anthem. Talks of the reintroduction of the Deutsche Mark have increased recently due to the stresses in the Eurozone. Some believe that the euro will cease to exist in a few years, some believe that the structure of the euro needs to change, and some believe that it will exist with different members. Whichever result actually happens, traders can find the market's expectation of a new Deutsche Mark by looking at German government yields.
Germany's outstanding debt is denominated in euros, however many expect that, should the euro cease to exist, that sovereign debts would be re-denominated into local currencies. As one of the stronger members of the euro, Germany has benefited from a weaker currency than what a local currency would be. Thus, exports have driven economic growth and have also led to unemployment falling to record lows in Germany.
German bonds have seen yields go negative on shorter-maturity bonds, meaning that investors have been willing to pay Germany just to make sure it gets the rest back. However, there could be other reasons for yields going lower. For example, German bonds may be incorporating an implicit call option on Deutsche Marks into the yields. As the bonds would most likely be re-denominated into Marks, German bonds thus have a call option on Marks embedded into them, and the low or even negative yields reflect, in part, the cost of this option.
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