Bond Shortage

More Money, Same Problems

Bunds-Imago
Investors would have liked more €100 notes.
  • Why it matters

    Why it matters

    The absence of new debt issuances from Germany for a second straight year represents a problem for investors eager to park their money in uncertain times.

  • Facts

    Facts

    • Germany is planning €214.6 billion in bond issues in 2016, up from $186.5 billion borrowed in 2015.
    • Surging tax revenues will help government finance the refugee crisis without new net borrowing.
    • Investors are still buying German bunds despite historically low yields.
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    Audio

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Europe’s largest economy has long been the biggest safe haven in Europe. The trouble is that Germany simply isn’t giving investors enough debt to work with.

The market for German debt has become extremely tight over the past few years, as the euro zone’s debt crisis scared some investors away from southern European countries and the European Central Bank has become a major buyer of government bonds for the past year.

For those investors who were hoping 2016 might be different, they will not have liked the latest plans unveiled by Germany’s supreme debt agency and its head, Tammo Diemer.

The German Finance Agency on Wednesday said it will issue no new debt in 2016 for the second straight year, though it will slightly increase its borrowing from financial markets in 2016 by issuing bonds worth a total of €214.5 billion, compared to €186.5 billion borrowed in 2015. The extra borrowing will be needed to refinance maturing securities.

Mr. Diemer’s hands are tied, thanks to Germany’s determination to balance its budget once again next year, despite the rising costs stemming from a flood of more than one million refugees that have arrived in the country this year.

All this leaves investors without many options if they want to invest in safe government debt.

“With the ECB continuing to buy bonds at full steam, there will not be that many German bonds left for investors,” Jan von Gerich, chief strategist at Scandinavian bank Nordea, wrote in a research note.

It's hardly going to be enough for investors, who are still buying German government securities in their droves despite historically low yields.

Europe’s largest economy expects to continue on the same course in the coming years: A balanced budget provision that takes effect in 2016 limits net new borrowing to 0.35 percent of the country’s gross domestic product.

The consequences of the government’s consolidation efforts for global investors hoping to park their money in the safety of German bonds, known as Bunds, were presented in detail Wednesday as the country’s debt agency released its eagerly awaited numbers for 2016.

“The issuance plan is based on a balanced budget,” said Mr. Diemer, who heads the finance agency.

Mr. Diemer said he expects the gross capital requirement in 2016 to be slightly higher in part due to the refugee crisis, but these additional costs are being covered by a €6-billion surplus from 2015, when the agency wound up borrowing less than it initially expected.

Mr. Diemer said he expects new issuance in coming years to hover around the €200 billion level, despite the balanced budgets, a previous bonds come to maturity.

That’s hardly going to be enough for investors, who are still buying German government securities in their droves despite historically low yields. A combination of falling supply and strong demand has kept German bond yields plumging to record low levels.

Yields on outstanding German bonds with maturities of less than four years have fallen into negative territory. Two-year German yields fell as low as minus 0.403 percent recently and five-year yields were as low as minus 0.183 percent.

The demand isn’t going to lessen in 2016. The European Central Bank, which launched a €1.1-trillion bond-buying program last March, earlier this month said it would expand that program for another six months into March 2017, bringing the total bonds being purchased to over €1.5 billion. About a quarter of those are bought in Germany.

And yet, calls from many international policymakers for Germany to increase spending – and thereby also increase the supply of debt for markets – have fallen on deaf ears.

German Finance Minister Wolfgang Schäuble has proudly presented a second straight balanced budget after the government was in the black in 2015 for the first time since 1969. That accomplishment, which impresses debt-averse German voters, is likely to become one of the main campaign slogans of his conservative party in the 2017 election. The government has already devoted some €6 billion in surplus revenues it had in 2015 for refugee relief.

Whether he can really meet his promise in coming years remains to be seen. The DIW economic research institute in Berlin expects state spending to help mitigate the refugee crisis to rise to €15 billion in 2016 and €17 billion in 2017. Germany and Sweden are taking in the bulk of refugees as Europe struggles to cope with the worst crisis since the end of World War II.

Surging tax revenues that helped reduce the government’s projected borrowing in 2015 by some €13 billion will also help Germany maintain a balanced budget in 2016, shielding it from external shocks such as costs associated with refugees.

But it will still need to borrow some additional money on capital markets next year to refinance a larger amount of maturing securities and due to the rising costs to support the refugee crisis.

German Finance Agency said the government’s issuance plans for next year include €48.5 billion in six- and 12-month securities, or an increase of €18 billion from 2015. It will also issue €154 billion in bonds with maturities of two, five, ten and 30 years.

On top of that the agency will issue between €8 and €12 billion in inflation-linked bonds, known as linkers – a relatively recent creation still in the experimental stage. That compares to €12 billion in linkers issued in 2015.

The biggest surprise of Wednesday’s announcement comes with the 30-year bonds, where the government will issue more than €9 billion in 2016 compared to just €6 billion in 2015. The agency is thus locking in the current low interest rate for more borrowing next year over the long term.

Mr. Diemer said that the 30-year issues in 2015 were initially somewhat disappointing, with investor demand below the supply that the agency wanted to place. It then held a portion back and offered smaller amounts in subsequent auctions that led to greater investor demand. Mr. Diemer said that the larger volumes appeared to be too great a challenge for investors while smaller volumes should work better in the future.

 

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

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