Germany adds 54 billion euros to bonds to use for repo, energy spending

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By Yoruk Bahceli

(Reuters) -Germany’s finance agency said on Wednesday it had increased the size of the outstanding bonds on its own account to lend to investors in return for cash, helping cover financing needs arising from the energy crisis.

The finance agency, which manages Germany’s debt, will increase the size of 18 bonds by 3 billion euros each, totalling 54 billion euros ($53.00 billion), on its own books to use in the market for repurchase agreements, or repos, where it lends bonds to investors in return for cash.

That will give the German government flexibility to cover financing needs arising from the energy crisis, the agency said.

The decision mirrors its strategy at the height of the COVID pandemic in 2020 which saw the agency increase holdings of its own bonds by 42 billion euros in the face of unexpected funding needs.

This latest increase was for bonds that the agency said were in high demand.

German government bonds are a key market collateral for investors in the euro zone, and have been short in supply after years of European Central Bank bond purchases. That shortage makes it hard for investors to borrow them in the repo market.

The finance agency usually retains a small amount of the bonds it sells in regular issuance on its own books, using them for repo transactions and lending them to investors in return for cash.

It can increase such operations to ensure markets function smoothly and did so earlier this year, when it upsized a bond in the aftermath of Ukraine’s invasion to use in the repo market.

“It is obvious that the true reason is the impaired liquidity in Bunds; the latest auctions speak for themselves,” said Michael Leister, head of interest rate strategy as Commerzbank, referring to recent German debt sales that have seen historically weak demand.

LIMITED IMPACT?

Analysts have also been concerned about a scarcity of collateral causing dysfunction in already volatile markets around year-end, when portfolio managers bulk up on collateral to reduce risk over the holiday period, when liquidity is thin.

“It will definitely lower some concerns about year-end,” said Lyn Graham-Taylor, senior rates strategist at Rabobank, calling the decision a “chunky-sized operation”.

The German two-year swap spread, which measures the difference between the bond yield and the fixed leg of a two-year interest rate swap that investors pay to hedge against rising rates in exchange for floating-rate payments, narrowed by 6 basis points (bps) to 91 bps, the smallest gap since early September. <EURAB6E2Y=>

But it is still up around 60 bps this year, highlighting the shortage of available collateral. It recently touched its widest since the euro zone debt crisis.

“This reaction is rather tame considering the moves we had in recent months,” Leister at Commerzbank said.

Analysts said support to the repo market from Germany’s decision would likely be temporary.

With the European Central Bank deciding to renumerate government deposits at euro zone central banks only until April 30, debt offices are likely to have an incentive to cut larger cash balances, making them less likely to lend bonds to investors in the repo market in the future.

Details of the bonds increased in size are as follows (in billions of euros):

Security Coupon ISIN Maturity Volume New volume

Federal 0 DE0001104867 15-Dec-23 3.0 18

Treasury note

Federal bond 0.5 DE0001102374 15 Feb 25 3.0 30.5

Federal note 0 DE0001141810 11 Apr 25 3.0 23

181

Federal bond 1 DE000110238 15 Aug 25 3.0 30.5

2

Federal bond 0.5 DE0001102390 15-Feb-26 3 33.5

Federal note 0 DE000114183 10-Apr-26 3 28

183 6

Federal bond 0 DE0001102408 15-Apr-26 3 32.5

Federal bond 0.5 DE0001102424 15-Aug-27 3 32.5

Federal bond 0.5 DE0001102440 15-Feb-28 3 28.5

Federal bond 0.25 DE0001102457 15-Aug-28 3 28.5

Federal bond 0 DE0001102556 15-Nov-28 3 27

Federal bond 0.25 DE0001102465 15-Feb-29 3 29.5

Federal bond 0 DE0001102473 15-Aug-29 3 29.5

Federal bond 0 DE0001102499 15-Feb-30 3 28

Federal bond 0 DE0001102531 15-Feb-31 3 28

Federal bond 0 DE0001102580 15-Feb-32 3 31

Federal bond 1.25 DE0001102432 15-Aug-48 3 34.5

Federal bond 0 DE0001102572 15-Aug-52 3 19

Total 54.0

($1 = 1.0190 euros)

(Reporting by Yoruk Bahceli; Editing by Amanda Cooper)