Germany needs billions of dollars to fix its energy crisis, but no one is buying its bonds.

Asian Trade TVOctober 27, 2022

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Germany is thought to be the most reliable debtor in Europe, but it is having trouble selling its bonds at the same time that it needs billions of dollars to deal with the energy crisis.

Recent weak auctions have shown how hard it is to sell debt in markets where there is a lot of uncertainty about interest rates and government spending. This has made it harder for Germany, which is usually reluctant to spend money, to pay for its 200 billion euro ($201.40 billion) plan to cut energy costs at home.

On Tuesday, demand for German 5-year government bonds was low, but other recent auctions have been “very, very, very bad,” said Michael Leister, head of rates strategy at Commerzbank (ETR:CBKG). He compared the situation to a “buyers’ strike.”

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For example, Germany’s finance agency sold just 1.78 billion euros ($1.77 billion) worth of new bonds for 2029 earlier this month, which was less than half of the target of 4 billion euros.

According to an analysis of finance agency data by Reuters, the ratio of bids to offers at the sale was 0.47, which was the lowest for any 7-year German bond sale and the second lowest for any auction since 1999. Germany kept 55% of the amount issued on its own books, which was the second-highest amount ever. Bid-to-offer ratios at auctions of 2-, 7-, and 15-year notes have also hit new lows in the last year. Separate Refinitiv IFR data shows that Germany gave a third of a recent weak 30-year syndicated bond sale to hedge funds, which is a very high share for a government sale. A FLOOD OF BONDS Two things stand out to analysts. First, a big increase in German and European bond sales is expected as governments try to deal with the energy crisis. Second, central banks are raising interest rates quickly and are planning to slowly pull out of bond markets.

Bank of America (NYSE:BAC) says that in 2023, governments in the Euro zone and the European Union as a whole will issue a record 400 billion euros of net debt. The European Central Bank won’t be there to buy up the debt, as it has been doing in the past through emergency programmes. Germany’s over-reliance on Russian energy has hurt it a lot, so it plans to borrow a lot in the next few years. Last week, the German Parliament voted to remove a constitutional limit on how much it can borrow. “It’s mostly a German story,” said Piet Haines Christiansen, chief analyst at Danske Bank. “Germany is the most affected by the energy transition.”

On the other hand, France’s finance agency sold 10 billion euros’ worth of medium-term bonds on October 20, which were in high demand. The ECB is considering plans to begin reducing the amount of assets it owns.This is called “quantitative tightening” (QT). Sphia Salim, head of European rates strategy at Bank of America, said, “Both supply and QT are very new ideas. Investors have only started thinking about them in the last four weeks or so. Volatility hurts auctions The uncertainty about borrowing and QT has made bond markets in the euro zone even more volatile. These markets were already shaken by the effects of Britain’s now-cancelled plans for big tax cuts that wouldn’t be paid for. At an event on Tuesday, Tammo Diemer, head of Germany’s finance agency, said at an event on Tuesday that banks that sell German bonds aren’t bidding in debt auctions because of how volatile the market is. “The volatility is really what makes it hard… When they bid at auctions, members of the Bund auction group take a chance. Diemer said this about Germany’s primary dealers, who buy debt at auctions and then sell it to investors. Commerzbank’s Leister said that these dealers don’t want to buy bonds because the market is unstable, even though there is demand for government debt as collateral in other deals. Even though the German 10-year yield has gone from -0.2% at the beginning of the year to 2.2%, which is close to its highest level since 2011, prices have gone down. Leister said of longer-term debt, “No one wants duration risk here because the Federal Reserve and the ECB are raising rates.” Joann Spadigam, a rate strategist at NatWest Markets in London, said that buyers can get a better return elsewhere because Germany’s yields are still low. “I think there wasn’t much interest because buyers don’t want to take on too much risk at the end of the year and other bonds are more appealing.”