MNI INTERVIEW: More Bund Demand From Cenbanks, Sovereign Funds

Germany is seeing more demand for its debt from central banks and sovereign wealth funds from both Europe and Asia, as well as from pension funds as the European Central Bank reduces its holdings of bunds, a member of the executive board of the German Finance Agency (DFA) told MNI, pointing to "extraordinary" interest from investors in the Netherlands in particular for its recent 20-year sale.

“German government bonds now provide a yield against swaps, which is attractive from a liquidity manager's perspective,” Tammo Diemer said.

“We see pension funds due to the higher yield curve, in particular at the long end.”

Germany’s new 20-year, which was issued alongside preexisting 15- and 30-year debt, received a strong reception, he said.

“Interest from real money investors [in the 20-year Bund] was extraordinary,” Diemer said. Almost 25% of this issuance was allocated to Dutch investors. “There was very high interest from the Netherlands… we haven’t seen such a high interest in a conventional bond [from Dutch investors] for many years."

Diemer said the German bond market is attractive to new entrants, including hedge funds.

"We have a very rich futures market, in conjunction with a very well functioning repo market, and also the secondary market is characterised by high turnover," he said.

"Warehousing capacity of banks since the financial market crisis has clearly decreased, and trading-oriented institutions, in a sense, fill that gap and support the market, for instance, during these events like auctions.” (See MNI INTERVIEW: Must Tackle Hedge Fund Debt Risk - BIS's Gelos)

GREEN BOND

The DFA has still not decided when this year it will issue its new 15-year green bond, Diemer said, though he added that green issuance should slightly increase demand for conventional debt of equivalent tenor.

“There is no significant difference in the trading behaviour, in the turnover, or in the trading volume in the conventional space, whether an item has a sibling or not,” Diemer said. “The existence of a green sibling actually improves the liquidity of the conventional sibling” to a very slight degree. (See MNI INTERVIEW: EU Bond Market Needs More Issuance-ICMA's Hill )

In this way, "the green twin bond provides no competition that can be measured or is reflected in market-relevant data.”

Germany announced its 2026 issuance plan on Dec 18, which "seems to be fully in line with demand from market participants.”

At the long end of the curve, Germany operates a dual-line system, where one bond is announced well in advance of the auction and the other a week ahead. This provides the DFA flexibility to react to market conditions, Diemer said.

This approach “is, on the one hand, reliable and predictable, and on the other hand, allows us to react to specific market demand.” (See MNI INTERVIEW: Germany Still Risks Excessive Deficit Procedure)

BID-TO-OFFER

Still, bid-to-offer ratios have varied lately, and the agency has generally retained a quota of about 25% of the auction value.

"Our response to this varying bid-to-offer ratio is our own holdings, our own retention quota." For many decades the Finanzagentur has only accepted offers that are in line with the secondary market.

"The important role that we play is being the reference yield curve for the euro area,” he said, noting that “[German] Government Bonds account for 15% of eurozone GDP, whereas the Treasury market accounts for more than 100% of U.S. GDP. So, this is the difference, which makes it clear that in our case, the focus must be on turnover."

The most recent decision to tap the 30-year bond at a Feb 11 auction is “steered by our own experience in the secondary market and discussions we have with interested banks,” as well as information from investors, he said.