Exclusive: Interview: German Finance Agency’s Diemer: Can’t Imagine Re-Entering Linker Market

23 October 2024

By Marta Vilar – MADRID (Econostream) – Germany is highly unlikely to re-enter the inflation-linked bond market after having exited in 2024, according to Tammo Diemer, member of the Executive Board of Germany’s Finance Agency.

In an interview with Econostream on October 8 (transcript here), Diemer said that the decision to abandon this market was ‘permanent’ and ‘strategic’.

In justifying the exit, he explained that being present in it meant that only a short period of high inflation could ‘damage your whole performance of the last years’.

‘The predictability of your interest expenditures decreases when you use linkers as a refinancing instrument’, he said.

Asked about a potential situation that could lead Germany to return to inflation-linked bond sales, Diemer said he could not ‘foresee any circumstances that would lead to re-entering it’.

Regarding Germany’s annual preview of 2025 issuance plans, made public in December, Diemer noted that Germany had ‘extended our short-term bill issuance activities until 2021 and since then we have reduced those short-term issuance activities again.’

‘I would be surprised if this number would increase again’, he added.

The bid-offer ratio at Germany’s most recent green auction as of the date of the interview was 2.3, compared to 1.5 on average.

‘Overall, this year we have been able to issue our green bonds in the primary market with a greenium’, he said.

‘There is almost no room’ for the German Finance Agency to be opportunistic in its issuance strategy, he said. This, however, does not rule out modifying the horizon or the product mix of the portfolio, according to Diemer.

‘We added 7-year and 15-year maturities four years ago in our calendar and at some stage we may reduce these kind of product types again or add a new product type to our activities, but all of this is pretty long term’, he said.

The fact that long German debt trades at a higher yield than underlying swaps was a result of stronger supply of these maturities as well as higher demand on swaps in the long end of the curve from pension funds, he said.

As for how economic weakness could impact Germany’s current AAA rating, Diemer denied that there would be any impact, arguing that rating depended on other factors like debt structure, governance or the size of the economy.

Furthermore, Diemer rejected the idea that weakness in terms of economic activity could jeopardise German debt’s safe haven status.

‘Even though the German economy might be performing poorly, the German bund market functions well, even better than some years ago’, he said.

While the German economy had registered very subdued growth in the last few years, others, including southern European economies, had outperformed, he observed. This explained the narrowing of their bond spreads with the German bund, he said.

‘For us this narrowing is really more of a normalisation’ and ‘the basic trend given inflation and spread developments’, he said.