Fixed income

Germany to sell fewer bonds to refinance old debt

DDR – Mark-Scheine 1973
Make it rain! Source: DPA

Among colleagues from his center-left Social Democratic party, Germany’s new finance minister Olaf Scholz is sometimes referred to as “Olaf Schäuble,” after his conservative predecessor Wolfgang Schäuble.

The underlying joke being: is there really any difference? Since taking over in March, Mr. Scholz has stuck strictly to Mr. Schäuble’s tight fiscal policies. This means, above all, no new debt added to the federal budget. Mr. Schäuble prided himself on his “black zero” – a balanced federal budget, achieved every year since 2016. And Mr. Scholz is no different.

But this year will be different, if only a little. The government will spend less money than planned to roll over old debt by selling new bonds to investors. In the upcoming third quarter of 2018, the country will spend €6 billion ($7 billion) less on bond buying than originally planned. Last quarter, spending on new bond issues was already €2 billion less than planned. Underlying these savings is the German economy’s continued good health, which saw tax revenues grow 6.8 percent month-on-month in May.

Old debts made new

In total, Germany will borrow between €181 billion and €185 billion this year, divided between €36 billion in short-term money market instruments, €139 billion in fixed-interest bonds with terms between 2 and 30 years, and a further €6 billion to €10 billion in inflation-indexed bonds.

Every December, the government agency responsible for the national debt determines how much money the federal government must borrow to refinance old debt. Then it establishes dates for debt auctions and announces the volume of new debt to be issued. Inflation-indexed bonds are the only category where the specific amount is not set in advance.

There is no particular pattern to the reduction in new debt: a total of 7 bond issues will be trimmed by between €500 million and €1 billion. Nonetheless, new issues are substantial, around €4 billion in total. Top-ups of existing 30-year bond issues will add around €1 billion, along with €3 billion reissued via existing shorter-term bonds.

Analysts had not expected the savings, and the price of German sovereign bonds increased slightly on the news. Conversely, the yield on 10-year bonds – Germany’s most popular issue – fell to 0.35 percent, reaching its lowest level since the end of May.

With demand for German bonds set to fall when the European Central Bank (ECB) ends its bond-buying program, analysts look favorably on the tightening of supply. The ECB is due to cut its purchases in half in October, and to end them completely in December.

Andrea Cünnen works at Handelsblatt’s finance desk in Frankfurt, reporting on the bond markets. To contact the author: cuennen@handelsblatt.com

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