Germany Tries to Find Out Who Its Investors Are

(Bloomberg Opinion) -- It's not all sunshine and roses being Europe's benchmark borrower. Germany has a unique problem in that its AAA-rated debt is so revered as collateral that it's very expensive to actually buy. The country's debt agency has sharply increased its second-quarter borrowing program to 130 billion euros ($140 billion) to help pay for the Covid-19 crisis. Given that investors already have to pay to lend money to Berlin, one might think this would be a challenge.

But Germany brushed off any such concerns on Wednesday with a successful new issue of 15-year bonds, paying zero interest and redeeming at face value (below the price investors will have to pay). Some 7.5 billion euros of bonds were on sale, and there was demand for 35 billion euros worth.

Berlin clearly wanted to put a significant dent in this year's borrowing target so it offered a relatively generous 8 basis-point premium over its similar existing bonds. Even so, the notes will yield about -0.33%, meaning an investor holding them to maturity will only receive 95 cents back for every euro they lend — effectively building in a capital loss. With most official European Central Bank interest rates even further below zero, the deal was priced relative to bank funding costs in general.

The smooth placement of this new bond shows that investors aren't overly concerned about the German constitutional court ruling on Tuesday that requires the ECB to justify the “proportionality” of its asset-purchase program. That judgment could, in theory, force the German central bank to offload 600 billion euros of its own sovereign debt, putting pressure on its bond prices. But the markets appear to have deemed this as a legal or political issue that won't make much difference to the ECB's quantitative easing policies.

For the first time in five years, Germany hired a syndicate of banks to raise the debt rather than relying on its somewhat clunky regular auction process via primary dealers. The 15-year maturity is unusual too, with no obvious domestic or foreign demand for this duration. Recent auctions in longer maturities have occasionally “failed,” with the order book coming in at less than the amount available. Getting the bank syndicate to do the sale avoids that potential embarrassment.

Most European sovereigns use this syndicated route with considerable success as it lets them raise large amounts of money, while using the expertise of the group of banks to get a clearer picture of who's buying. With its funding needs spiking, Germany suddenly needs to find out more about its investor base — and to broaden it. It hasn't really had to do much in recent years as its ratio of debt to gross domestic product fell below 60%, and its borrowing requirements declined.

The economic aftershocks triggered by the pandemic mean even Germany has to be flexible in how it raises money, including new-issue discounts. As every European country gears up to borrow more, innovation, adaptability and concessionary pricing will become commonplace for all issuers. It's a competitive market out there.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.