As the safest debt in the region, Germany's sovereign bonds are the lifeblood of European financial markets and the most coveted collateral for guaranteeing trades at clearing houses.
Investors are currently paying 0.99% to borrow German bonds against cash for two months, implying a 7% rate for bonds lent on Dec. 31 for the following Monday, data on Refinitiv Eikon shows. Borrowing the debt for two months cost 0.6% two months ago. Ironically for the ECB, the shortage of German bonds available to be borrowed risks causing funding markets to seize up, making credit more expensive and going against the spirit of the central bank's easy-money policy.
The issue has been bubbling in the background for years but it has blown out in recent days on investor concern about a German bond pinch around year-end when issuance falls and banks shrink their balance sheets to meet regulatory demands.