The government is taking on additional debt this year
In the ever-changing global economic landscape, German government bonds continue to be a safe haven for investors. According to Tammo Diemer, CEO of the debt management agency, there is a growing demand for these bonds, particularly in the very long maturity range.
This demand is partly attributed to the political and budget crisis in France, which has benefited the demand for German federal bonds as a safe haven. Despite the crisis, French government bonds are still certified with a very low default risk for investors.
The federal government plans to borrow an additional 15 billion euros from investors in the fourth quarter of this year, adding to the record debt increase of half a trillion euros in 2023, primarily due to the fight against the Corona crisis and the consequences of the Russian war against Ukraine.
However, the German government's debt management has rejected issuing 50-year bonds. This decision is based on concerns about future interest rate risks and fiscal sustainability, as very long maturities could lock in unfavorable conditions and limit flexibility in managing public debt.
Instead, the 30-year bonds remain the longest for federal bond maturities. The federal government will refinance itself with the known instruments, not issuing 50-year bonds. Tammo Diemer stated that there is only very isolated structural demand for 50-year federal bonds.
The demand for federal bonds is possibly due to previous investments in dollar bonds, but this is not clearly seen. Many investors, including pension funds, central banks, and insurers, like to cover themselves with German government bonds. Germany, with a top credit rating of AAA, is a sought-after borrower.
In recent weeks, there has been an increase in demand for German federal bonds due to a need for a safe haven. This increase may necessitate higher interest rates to entice investors to buy additional federal bonds worth hundreds of billions of euros.
Looking ahead, the debt management agency has announced a total of 19 billion euros more was targeted for the third quarter than originally planned. By 2025, around 425 billion euros are expected to flow into the state coffers through the sale of federal bonds, an increase from the originally planned 380 billion euros.
Despite the challenges, the German government's debt management strategy appears to be striking a balance between meeting the country's financial needs and maintaining the confidence of investors. The reaffirmation of Germany's top credit rating by European rating agency Scope at AAA and a stable outlook is a testament to this strategy's success.
Meanwhile, Fitch has downgraded France's creditworthiness to A+, the lowest level ever, due to the political crisis and rising debt. A worse credit rating for France could increase the costs of refinancing its national debt, further highlighting the attractiveness of German government bonds.
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