Source: Bloomberg
Source: Bloomberg
German postcard depicting Krampus, cir. 1900. Photo: Wikipedia

German Christmas festivities include a horned demon called the Krampus, who chastizes badly-behaved children. In the central banking world, Bundesbank President Jens Weidmann plays Krampus this Christmas, as bond prices continue to fall in anticipation of a big shift in European monetary policy.

The European Central Bank set its policy rate below zero and forced yields on high-quality government bonds to less than zero in order to force yield-hungry investors to buy Italian bonds. No sane investor would buy Italy except out of dire necessity. The ECB’s Italian president Mario Draghi persuaded the Germans and Dutch to go along with negative interest rates in order to give Italy time to sort out its sclerotic, inefficient economy, but the northern Europeans can’t do this for very much longer. At negative or negligible yields, every pension fund in Europe will go bankrupt. That’s not a popular course of action in a rapidly-aging society.

Jens Weidmann. Photo: dpa

Investors know that Krampus will turn up eventually to punish the naughty members of the Eurozone, and are selling European bonds. That selling spills over into the Treasury market.