Germany hits bond market yet again as budget ramps up borrowing

  • Economy
  • Thursday, 18 Jun 2020

Financial injection: The headquarters of the ECB in Frankfurt am Main, western Germany. Unprecedented levels of asset-buying from the central bank are maintaining a perceived shortage of the securities in the market.— AFP

FRANKFURT: Germany is selling its second round of debt within days to a market still hungry for haven assets.

After drawing over 31 billion euros (US$35bil) of orders for 30-year bonds sold via banks last week, Germany will offer five billion euros of its benchmark bunds on Wednesday.

That’s the largest auction since January, as the country increases the pace of its borrowing to fund a massive stimulus program.

Fund managers are uncertain whether bunds will rally or slide given the risks of a second wave of the virus and the prospects for an economic recovery. Yet unprecedented levels of asset buying from the European Central Bank are maintaining a perceived shortage of the securities in the market.

“German net supply for the year should remain negative, in spite of the substantial fiscal package, ” said Henry Occleston, a strategist at Mizuho International Plc.

“The market coming around to this fact, alongside the current risk-off sentiment, should mean the auction is well received.”

Bund yields have been holding their ground at around -0.40%, just above the ECB’s deposit rate, after sliding to record lows during the coronavirus-driven market turmoil in March.

That puts them at around their average level in the past year.

Despite the negative yields, traders can still make money if the bonds rally during bouts of risk-off sentiment. Buyers holding the debt to maturity are effectively paying the government to borrow.

Chancellor Angela Merkel’s cabinet is due to sign off on a supplementary budget on Wednesday, including a further 62.5 billion euros in debt, designed to pull Europe’s largest economy out of its worst recession since World War II.

The bidding deadline for the sale of bonds, with a 0% coupon expiring in August 2030, is 10:30 am in London.

The prior sale in May received bids more than twice the amount offered.— Bloomberg

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