Eurozone’s sovereign strongman continues crisis power play

If any one European borrower could be said to be having a good crisis, it is Germany. Investors prefer to see the real value of their capital eroded by the sheer expense of holding low yielding German paper than risk putting it with anybody else. Ralph Sinclair asks Germany’s Finanzagentur if this can continue.

  • 23 Nov 2011
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Owning German sovereign securities is expensive. An investor would have to look as far along the curve as 10 years before he found an inflation-beating return. That Bund yields around 1.72% versus the most recent European Core CPI year-on-year change of 1.60%.

And that doesn’t even take into account the cost of financing that position — and in short dates, German yields are even meaner. In mid-November, three month Bubills were bid for as little as 0.113% against an offer of -0.187%.

The view is clearly that you will not get rich owning German bonds but you will see more back at the end of the trade than in plenty of other sovereign markets. That seems unlikely to change.

Germany commands a flight to quality premium from investors and the supply of German debt securities looks set only to become smaller. "Investors are willing to pay a safe haven premium to hold our bonds which explains some of the historical low yield on our debt," says Carl Heinz Daube, managing director of the German Finanzagentur. "But also, if you look at what our government did, it reduced the borrowing requirement when it saw it did not need the cash which is always good news. Germany is showing some economic strength, good tax revenues and lower benefit spending."

Daube credits Germany’s 38 primary dealers for their part in a successful year. "Our auction performance went very well, in terms of price as well as volume," he says. "We have been very happy with how the year has gone and the 38 banks in our auction group did a good job."

Primary problems

However, the Finanzagentur has not managed to escape the complaints that dog sovereign issuers from dealers that primary dealerships are an expensive business that banks can ill afford when times are tough.

Daube says banks should take a more holistic view of the business they conduct with the German sovereign. "I know the complaint about losing money in auctions," says Daube. "I don’t take it too seriously. After all, we do not force banks to participate in our auctions. They all have the opportunity to transact business with us in money markets, repo, Eonia, swap and secondary markets and they all make good revenue. The trading volume in the first half year 2011 was €3.1tr and shows our liquidity is among of the best in Europe — any volumes are executable in any market situation. The bottom line is that we don’t sell risk, and returns reflect that. That doesn’t mean that anyone is losing money on Bunds."

About the only variations Germany may consider next year is in looking to issue a dollar bond, although Daube thinks this unlikely. Meanwhile, ultra-long trades, syndications in fact, pretty much everything outside of what Germany does at the moment, is all but ruled out.

For Germany there are no compelling reasons to change the modus operandi and only downside risks if it did. "To enter into a very long dated bond, we would have to receive an interest rate or risk reduction benefit and for it to become a long term viable issuance point on our curve," says Daube. "We are reluctant and cautious to issue new products.

"There is also a risk that if we are seen to be doing arbitrage, opportunistic funding, people will take the message that somehow we are not serious about the product. We don’t have a need to do small clips, we need to do large volumes, for which an opportunistic approach is not a long-term option. That would be a destabilising message to send."

The power to maintain that consistent approach to markets is not set to change. Germany will not post collateral for derivatives trades — which it uses to keep its portfolio duration to between six or seven years — anytime soon. That is despite the growing clamour from banks to renegotiate credit support annexes in the face of spiralling financing costs for derivatives positions.

"We have lost some banks to do derivatives business with because of the increased charges they face but we have found new ones," says Daube.

That is not to suggest that Germany is a complacent borrower. Rather that it is looking to enjoy the advantages, and responsibilities, of being the eurozone’s best bid credit.

"Uncertainty and volatility is the biggest challenge next year," says Daube. "But Germany — as the core issuer in Europe — is reliable when it comes to its announced issuance plans."

Stick to the plan

Germany expects to have borrowed €275bn by the end of 2011 and although the budget plan for next year will only go through the Bundestag at the end of November, that total is not expected to change.

Indeed, that number is lower than the €302bn it expected to raise at the start of the year as German economic performance looked robust. Issuance has steadily declined since 2009’s €329bn capital raising exercise and that will not bode well for investors looking for rosier returns. "Investors, sovereign wealth funds and central banks all like the low repayment risk and the latter have no limits on the amount they can buy," says Daube. "That means Bunds can look pricey, but in the current market environment, they are the best product you can buy within the eurozone."

Of this year’s €275bn, the mixture is expected to be split between €94bn raised in money markets and €181bn — including €8bn of index-linked issuance — raised in what the Finanzagentur defines as capital markets — longer-dated investments.

"We will keep doing auctions rather than syndications and the distribution across linkers, nominals and money market instruments will be about the same as this year," says Daube.

  • 23 Nov 2011

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 70,767.73 236 8.54%
2 JPMorgan 65,265.75 234 7.88%
3 Barclays 56,658.40 187 6.84%
4 Bank of America Merrill Lynch 49,197.71 178 5.94%
5 Deutsche Bank 44,635.32 162 5.39%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Bank of America Merrill Lynch 6,812.19 7 16.21%
2 Deutsche Bank 3,538.77 6 8.42%
3 Citi 2,570.45 7 6.12%
4 Commerzbank Group 2,532.05 5 6.02%
5 BNP Paribas 1,798.71 8 4.28%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 UBS 998.25 3 11.59%
2 Citi 801.18 3 9.31%
3 Morgan Stanley 606.80 4 7.05%
4 Bank of America Merrill Lynch 509.34 3 5.92%
5 SG Corporate & Investment Banking 431.66 3 5.01%