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The era of Bund scarcity is “definitely over”, said a senior German official, as the Eurozone’s safest borrower increases sales of its benchmark debt to fund a defence and infrastructure spending spree.
Tammo Diemer, an executive board member at Germany’s finance agency who oversees its sovereign debt issuance, pointed to the increasing availability of German bonds in the secondary market following the end of quantitative easing.
“Scarcity of Bunds is definitely over,” he told delegates at the Financial Times’ Global Borrowers & Bond Investors Forum in London. “There are only a number of securities where there is still shortness in the market.”
The constitutional limit on Germany’s debt level has contributed to the country’s status as the Eurozone’s safest borrower and historically created a shortage of its debt that suppressed its borrowing costs. Bunds provide a benchmark against which other countries’ creditworthiness is viewed.
The end to the European Central Bank’s bond-buying programmes, which had bought up huge amounts of Bunds and other government debt during previous crises, was a major driver of the greater availability, he added.
Germany’s borrowing costs jumped in March in their biggest one-day move since 1997 after it announced a €1tn spending package that exempted defence spending from its constitutional debt brake.
Underlining the normalisation in the market, Diemer pointed to German bond yields moving above interest rate swaps of the same duration, which happened for the first time last year as expectations mounted over debt brake reform.
The 10-year Bund yield, which near traded near zero for years, rose above 2.9 per cent in March, but has since fallen to around 2.5 per cent. Yields move inversely to prices.
Speakers at the event also pointed to growing interest among global investors in AAA-rated euro debt as an alternative to dollar assets, amid broad doubts over the greenback’s haven status. The proportion of global fund managers who are underweight the dollar is at its highest level for 20 years, according to a Bank of America survey on Tuesday.
Siegfried Ruhl, from the Directorate-General for Budget of the European Commission, which manages common EU issuance, said turbulence in dollar markets had attracted investors to common EU debt.
“We are seeing increased interest . . . We see new names in our [debt syndications] from countries or regions which are typically very dollar-based,” he said, adding that they were also receiving meeting requests from global investors. “At the moment it is an opportunity for Europe to strengthen its position [in the] global capital markets.”
Ruhl said the introduction of EU debt into sovereign bond indices, which has not yet happened, would be crucial to the development of the asset class.
Separately, officials responsible for issuing sovereign debt for other Eurozone borrowers, such as Ireland and Portugal, said there had been interest from foreign issuers looking to diversify away from dollar assets.
“It has definitely helped [the] spread compression” between Eurozone governments and Germany’s benchmark debt, said Dave McEvoy at Ireland’s National Treasury Management Agency.
Additional reporting by Emily Herbert
