Germany's debt agency is concerned about low demand for ultra-long bonds but does not plan to change its issuance schedule, its chief told Reuters, even as rock-bottom returns are testing the limits of investor appetite for safe-haven debt.
Germany struggled twice this month to sell long-maturity bonds, underscoring how surging demand for its debt, seen as safe during the euro zone's debt crisis, has pushed investment returns so low that some are now reluctant to buy.
An auction of 30-year Bunds with a record low 2.5 percent coupon last week drew fewer bids than the volume on offer, making it a "technical fail". German authorities retained 20 percent for sale in secondary markets at a later date, versus 18.1 percent in the previous auction of ultra-long bonds.
"The demand in this area is especially important to us," Carl Heinz Daube told Reuters in an interview. "We too are concerned that demand here has turned out lower due to the crises in the euro zone."
Daube said that meant no risk to the financing of the federal budget as the agency always retained a part of the volume on auction for sale on the secondary market.
"But that of course is also not optimal and … we always aim for (market) feedback to be able to adjust the federal debt offering to demand as well as possible."
RISK-FREE GERMAN BONDS
The euro zone's long-running debt crisis has flared up again in recent weeks on rising concerns about Spain's public finances and that has caused a fresh flight to safety that has pushed German benchmark 10-year yields to record lows.
Germany is now able to borrow more cheaply and for a longer period of time than any other euro zone country, leaving it in a strong funding position.
And demand for shorter-dated debt, which typically is preferred when investors are seeking a place to protect investments thanks to its greater liquidity, have proved more resilient. At a six-month auction earlier this year, investors actually paid to lend Germany and on the secondary market, bonds with short maturities have also fetched negative yields.
"Many investors have a pronounced need for safety. Therefore they are ready to pay high premiums for safety and liquidity," Daube said, but added he did not expect that to be permanent.
Daube said the debt agency would not seek to adjust its planned portfolio unless a long-term trend emerged. I t has said it plans to issue 252 billion euros of debt this year, down from 275 billion in 2011, and has issued 90 billion euros so far.
"I would not recommend changing the (issuance) calendar due to temporarily low interest rates. That would unsettle market participants," he said. "However, if a long-term (change in) market situation became visible, we would have to check whether we should propose to the federal government an adjustment of the strategy."
He expected interest rates, and therefore yields, to rise again, Daube said.
"There are several signs that we will re-enter a phase of rising rates," Daube said. "If investors see alternatives and do not just turn to the (German government) because it is the safest instrument, then that will influence the price."
But he said studies showing that the German government benefited from the crisis through lower interest payments were exaggerated, focusing only on the short term. Germany has outstanding debt of 1.1 trillion euros and an average yield across all maturities of about 3.9 percent, Daube said.
"The current yield level would have to continue for another three or four years for the average yield on emissions to fall to a significantly lower level," he said.
Daube said that given the low inflation rate, there was no strong demand for inflation-linked bonds. Germany would nonetheless issue the amount of so-called linkers it had committed to, and more if the demand increased.
"If the market situation changes significantly and the parameters are right, we would recommend to the authorities to introduce a 30-year linker as well."
Annual inflation in Germany dipped to the slowest pace in more than a year at 2.0 percent, according to preliminary data.
"Inflation is no serious topic at the moment," Daube said.
