EXCLUSIVE: Germany Finance Agency’s Diemer: Will Eventually Cease Issuing 15-Years Entirely
4 February 2022
By David Barwick – Frankfurt (Econostream) – The absence of 7-year issuance from Germany’s 2022 funding programme is part of a first step that will in principle eventually lead to the absence of 15-year issuance as well, according to Tammo Diemer, member of the Executive Board of Germany’s Finance Agency.
In a recent interview with Econostream, Diemer said that the lack of 7-year issuance this year had to do with the fact that outstanding German sovereign debt is a much smaller share of the total euro area economy, compared to the volume of US government bonds as a percentage of the US dollar economy.
This implies a need to ensure that specific maturity points provide a yield benchmark for the Eurozone as a whole, he said.
‘[D]ue to the exceptionally high funding volume needed in 2020, we introduced the 7-year and the 15-year brackets, but the goal is really to go back to 2-years, 5-years, 10-years and 30-years’, he said. ‘We have taken the first step by no longer issuing 7-year bonds, and we have significantly reduced the 15-year volume in 2022 compared to 2021.’
That can in principle be understood as a preliminary step to ceasing to issue 15-years entirely, depending on funding volumes in the year ahead, he confirmed.
After an increase in the amount of green funding in 2021 versus 2020, the Finance Agency expects ‘roughly the same amount or slightly more green expenditures from the budget 2021 to issue green bonds in 2022’, Diemer said.
German green issuance pursues the goal ‘to add value to the development of the green market’, in particular by making more transparent the spread between green bonds and conventional bonds, he said.
‘Clearly, the fact that there is this benchmark issuer from Germany with a transparent pricing differential between these two markets helps financial market participants price such new issuance’, he said. ‘And this is the value that we want to provide in 2022 as well, by making the existing points on the curve more liquid on the one hand, and adding a new maturity point on the curve on the other.’
‘This is how I expected we will continue in the years to come, having more and more liquidity in the various existing Green German government bonds and adding more and more points to the curve’, he added.
It is not established how much of the Finance Agency’s own holdings of Bunds would be sold off this year, he said. The amount could be ‘higher or lower than’ the €20 billion some observers expect, he said, depending on a variety of factors.
In this context, Diemer noted that the repo market was quite flexible ‘and very attractive from an economic perspective, in particular now, with still strong demand for German government bonds.’
There are no specific criteria for deciding what securities or tenors to run down, he said. ‘We tend to be active in bonds that offer a relative value, so we would be offering bonds that would improve our refinancing result’, he said.
Asked if the European Central Bank’s asset purchase activity would have any influence on this, Diemer said the Finance Agency was observing ‘strong demand for high-coupon bonds, and they sort of look particularly expensive on the yield curve. But whether this is really a result of the Eurosystem’s purchase activities, we can’t really say.’
Although the funding plan published last month included no ultra-long maturities, this decision is reviewed regularly, Diemer said. ‘[O]ver the last years, ultra-long maturities have become more and more attractive, but they haven’t yet reached the necessary threshold’, he said.
At the other end of the German maturity spectrum, Diemer confirmed that the net Bubill supply, negative this year, could be expected to continue negative beyond 2022.
‘We’ve been refinancing extraordinary financing needs in 2020, 2021 and 2022 to a large extent with additional bill issuance, and over the next years, it is reasonable – again, from a portfolio management perspective – to shift those short-term fundings into the various longer-term instruments’, he said. ‘So, we will sort of spread this over the curve during the next years. And in particular, if we return to balanced budgets from 2023 onwards, you correctly observe that this negative supply will continue over the next years.’
Should a positive growth surprise or anything else this year make funding plans more ambitious than necessary, the Finance Agency has options not part of the current calendar that would be ‘obvious candidates to be reduced in the event of lower financing needs’, he said.
These include syndicated transactions, the selling of own holdings to the secondary market, and the repo market, he said. ‘And last but not least, I’d like to mention that we actually started 2022 over-funded, since we did a bit more funding last year than we turned out to need’, he noted.
‘[W]e would do less repo transactions before we cut the calendar’, he said. ‘We would do less selling to secondary markets before we cut the calendar. We might do smaller syndications before we cut the calendar in 2022.’
In other comments, Diemer said that ECB asset buying ‘really has an impact on the market for German government bonds’, not just in terms of yields, ‘[b]ut also from a trading and liquidity perspective.’
‘So, a reduced purchase pace would first of all have a positive impact on the tradability of German government bonds’, he said with an eye toward Governing Council decisions.