Best borrowers 2015: Volatility is 'normal market adjustment'

Deutsche Finanzagentur tops borrower ranking for seventh year; Pricing mechanism comes with volatility, says agency

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Bund market has suffered wild price swings since news broke that German consumer price inflation had risen to 0.4% in April. Ten-year yields touched 0.799% in mid-May, up from a low of 0.05% the month before. By May 21 they were trading at around 0.65%.

The Bund was always going to be in the eye of the storm of the ECB’s sovereign bond purchasing programme, with the ECB aiming to buy 20% of outstanding bonds in a market with zero net issuance. However, recent events are all in a day’s work for the German debt management office, Deutsche Finanzagentur, which again tops Euromoney’s best borrower ranking for 2015.

"Most of the current volatility must be seen as a normal market adjustment after the initial impacts of the purchasing programme after the first months," says Deutsche Finanzagentur managing director Tammo Diemer. "Clearly the pricing mechanism in our markets, based on supply and demand, naturally comes with volatility. The beginning of the extended purchase programme of the ECB was accompanied by market talk about a potential 'scarcity’ of German Bunds."

Trading high

He adds: "In our discussions with market participants and journalists we made it clear that, according to the facts based on the information we have on last year’s secondary market activities in Bunds, tradability of Bunds will remain high, even though a new large buyer has entered the scene. Clearly, this new demand may have an impact on yield developments and volatility, but all the relevant market segments for Bunds: repo markets, future markets, primary and secondary cash markets are functioning well. As a result, the secondary market pricing of the German government securities forms a fairly smooth curve. So, there are no distortions from that point of view."

Buyers of German Bunds will likely have reacted to recent market developments with rather less equanimity, but the prevalence of negative yields has not necessitated a more intense focus on investor engagement by the agency.

"As a benchmark issuer it’s important to us to always act transparently and reliably," says Diemer. "We stay in contact with market participants and investors on a regular basis – regardless of the current yield level. We offer a quality product, which is recognized as the benchmark yield curve in the second most important reserve currency. Bunds fulfill this role even if one part of the curve yields negative."

Deutsche Finanzagentur managing director Tammo Diemer
Most of the current volatility must be seen as a normal market adjustment after the initial impacts of the purchasing programme

Tammo Diemer 

Diemer dismisses any suggestion that Deutsche Finanzagentur could react opportunistically to the unprecedented levels at which it can now borrow. Germany sold €3 billion benchmark 10-year Bunds on May 13 at an average yield of 0.65%, ending a straight run of 15 10-year auctions at which its borrowing costs had fallen. On April 15 it sold 10-year bonds at an average yield of 0.13%. Total issuance for 2015 is set at €185.5 billion nominal debt instruments and between €10 billion and €14 billion inflation linked instruments.

"The Bund acts strategically in the market and executes its funding program independent of yield developments," he says. "This is highly appreciated by market participants and the issuer benefits from this through attractive refinancing results. Some other large issuers may have a more opportunistic approach, which makes sense for them, but would not for the Bund. As already announced in 2014, this year we will possibly broaden our funding programme with a new strategy: The Bund intends to complete the maturity profile in the inflation linked segment by starting its 30-year Linker programme."

Record low yields will inevitably take their toll on investors, however. Last year saw a record 12 Bund auctions fail but so far this year only three out of 30 auctions have seen bid-volumes below issuance volume. The May auction was 1.3 times covered, down from 1.5 times in April.

The Bund auction process offers no incentives to primary dealers to participate and Germany has not issued a bond via syndication since 2006, but Diemer sees no need for reform of the process.

"All regularly issued German Government securities are issued via the 37 members of the Bund Issues Auction Group in a multi-price auction process," he says. "We do not see any reason to change this process: it is very liberal and part of our strategic market approach. We make sure that all our auctions are priced in line with the secondary market. As long as this is the case, we don’t consider an auction as failed.

"The German budgetary law allows us to hold parts of our outstanding bonds on our own books. This also applies to our auctions. We usually sell the bonds we hold back in the secondary market later." Roughly 15% of each auction is usually retained for secondary market purposes.