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The era of Bund scarcity is officially over, according to a senior German official, as the Eurozone’s most secure borrower ramps up sales of its benchmark debt to finance defense and infrastructure spending initiatives.
Tammo Diemer, a board member at Germany’s finance agency overseeing sovereign debt issuance, highlighted the increased availability of German bonds in the secondary market following the conclusion of quantitative easing.
“The scarcity of Bunds is definitively a thing of the past,” he informed delegates at the Financial Times’ Global Borrowers & Bond Investors Forum in London. “There are only a few securities where shortages still exist.”
Germany’s constitutional limit on debt levels has reinforced its position as the Eurozone’s safest borrower, creating a shortage of its debt that has historically kept borrowing costs low. Bunds serve as a benchmark for assessing the creditworthiness of other countries.
The cessation of the European Central Bank’s bond-buying programs, which had previously acquired large quantities of Bunds and other government debt during crises, was a key factor in the increased availability of German bonds, Diemer added.
Germany experienced a significant rise in borrowing costs in March, marking the largest one-day increase since 1997, after announcing a €1 trillion spending package that excluded defense spending from its constitutional debt limit.
Diemer noted the market’s normalization, citing German bond yields surpassing interest rate swaps of similar durations for the first time last year, as anticipation grew regarding debt brake reform.
The 10-year Bund yield, which had hovered near zero for an extended period, rose above 2.9% in March but has since declined to around 2.5%. Yields move inversely to prices.
Speakers at the event also highlighted a heightened interest among global investors in AAA-rated euro debt as an alternative to dollar assets, amid widespread skepticism about the greenback’s safe-haven status. According to a Bank of America survey on Tuesday, the percentage of global fund managers underweight the dollar is at its highest level in two decades.
Siegfried Ruhl from the European Commission’s Directorate-General for Budget, responsible for managing common EU issuance, mentioned that turbulence in dollar markets had drawn investors to common EU debt.
“We are witnessing growing interest… We are seeing new participants in our debt syndications from countries or regions that are traditionally very dollar-centric,” he commented, indicating that they were also accommodating requests from global investors. “Currently, it presents an opportunity for Europe to enhance its position in global capital markets.”
Ruhl emphasized that the inclusion of EU debt in sovereign bond indices, although pending, would be pivotal for the development of the asset class.
Additionally, officials handling sovereign debt issuance for other Eurozone borrowers like Ireland and Portugal mentioned a foreign interest in diversifying away from dollar assets.
“It has certainly contributed to the compression of spreads between Eurozone governments and Germany’s benchmark debt,” said Dave McEvoy at Ireland’s National Treasury Management Agency.
Additional reporting by Emily Herbert