Frankfurt A veritable flood of new federal securities will hit the markets in the new year. Germany has to borrow more than 539 billion euros from investors on the money and capital markets. This was announced by the finance agency responsible for German debt management on Wednesday.
The federal government has never had to use the markets as massively as it will in 2023. Compared to this year, bond issues have increased by a fifth. The reason for this is the high costs due to the energy and corona crises. Expenditure in the federal budget will also exceed income in the coming year, partly because of the gas and electricity price brake.
In addition, federal securities worth a good 325 billion euros will mature in 2023 and have to be refinanced. It will be a challenge for debt managers to find enough buyers for the bonds. On the one hand, the other euro countries also need more money, on the other hand, the European Central Bank (ECB) is not a major buyer of bonds.
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Germany is planning to issue new bonds with maturities of at least two years for EUR 295 to 299 billion in the coming year. In addition, there are money market papers with maturities of between three and six months over EUR 242 billion.
Other euro countries also need more money
The markets are primarily focused on bonds – and it is not only Germany that is issuing more of them. The major British bank HSBC estimates that the euro countries will issue bonds totaling EUR 1.2 trillion in the new year. That would be almost 100 billion euros more than in 2022.
The ECB is increasingly absent as a buyer. In recent years, the central bank has purchased bonds – mainly government bonds – from the euro countries worth more than five trillion euros. Since the end of June, however, the central bank has stopped buying new bonds and has only replaced expiring bonds. In the course of the next year, however, the ECB is likely to restrict these replacement investments as well.
Sebastian Fellechner from DZ Bank estimates that the ECB will reduce its balance sheet by 130 billion euros in the new year. That complicates the refinancing of the euro countries, emphasizes Fellechner.
ECB fails as a buyer
Ulrich Stephan, chief investment strategist for private and corporate customers at Deutsche Bank, expects that the countries of the monetary union will have to generate demand three and a half times as high for their bonds without ECB purchases in the first quarter as in the two previous years. While Stephan expects this to work, states may need to offer higher yields to attract buyers.
Tammo Diemer, managing director of the finance agency, tries to calm things down: “My impression is that the demand for federal bonds is still high.” In view of the increased yields, according to Diemer, investors such as insurers and fund managers are now interested in federal bonds again.
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These had withdrawn in times of low interest rates, but are now more active again. In fact, in their current annual outlook, asset managers such as JP Morgan Asset Management, Pimco, DWS, BNP Paribas Wealth Management and Schroders emphasize that bonds are more attractive again.
In view of the massive increase in inflation and the sharp turnaround in interest rates by the central banks, yields on the bond markets have historically risen quickly and significantly, contrary to the fallen prices. The yield on the ten-year federal bond, which serves as a benchmark for long-term refinancing in the euro area, has risen from minus 0.10 percent to as much as 2.4 percent since January. The situation has calmed down somewhat since October. The yield is currently around 1.9 percent.
The debt gets more expensive
This means that the return is as high as it was nine years ago. Investors get more money – for the federal government, refinancing is correspondingly more expensive. In 2022, according to the finance agency, the average return on all money and bond auctions was 0.62 percent.
In 2021, the federal government had still made money by taking on new debt. At that time, new bonds were placed with an average yield of minus 0.59 percent. For 2023, Federal Finance Minister Christian Lindner (FDP) expects interest costs of 29.6 billion euros – more than seven and a half times as much as in 2021.
Specifically, the finance agency has planned 73 dates for the new year on which it will issue or increase bonds. Conventional federal bonds with maturities of two, five, seven, ten and 15 years are to be auctioned for over 274 billion euros. In addition, there are auctions for a total of six billion to eight billion euros for bonds whose interest and repayment is linked to the inflation rate, and green federal bonds for 15 billion to 17 billion euros.
Four bond dates are not yet planned
In the case of green federal bonds, the use of funds serves to achieve environmentally friendly goals. Germany has only been issuing green bonds since 2020, but according to Diemer it is already the second green issuer in the euro area, behind France.
In addition, there will be four federal bonds that will not be awarded through an auction, but through bank syndicates. The exact volume has not yet been determined, but Diemer gives an indication. At the end of the year there were also four syndicated bonds totaling EUR 18 billion. Diemer can imagine a similar magnitude for 2023.
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In the case of syndicated bonds, banks act as lead managers and sell the securities to investors. This procedure, for which the banks receive fees, is also common with corporate bonds and ensures that there is actually more than enough demand as a rule. The federal government only uses consortium banks for bonds that are not quite as common. Syndicates for two new federal bonds with terms of 15 and 30 years and two syndicates for a ten-year and a “longer-dated” green bond are planned for 2023.
In the case of conventional and more established bonds, on the other hand, the federal government uses the auction process. The currently 31 banks bid on the bonds offered and only then sell most of them on to investors.
The Economic Stabilization Fund will receive money in the next few weeks
Before the end of this year, the finance agency will also provide the Economic Stabilization Fund (WSF) with the planned funds of 200 billion euros. The WSF finances measures to cushion the consequences of the energy crisis until the summer of 2024.
This year the fund paid out 35 billion euros. The finance agency refinanced this money regularly on the market. The agency will give the remaining 165 billion euros directly to the WSF via bonds and will only sell it on the market when the fund issues the money.
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