The federal government is now feeling the effects of rising interest rates

D.The sell-off in bond markets triggered by high inflation is now hitting the federal budget in the form of higher interest payments. And here the curve points sharply upwards: Finance Minister Christian Lindner (FDP) expects interest payments of € 16.3 billion this year and € 30 billion next year. This is much more than in the previous two years: in 2020, the Confederation had to spend € 6.5 billion in interest on its debt securities and almost € 4 billion in 2021.

The turnaround in interest rates is also felt by the financial agency responsible for debt management in the planning of issuances for the third quarter: on 6 July the new ten-year federal bond will be endowed with a coupon of 1.7 per cent . The federal government hasn’t had to pay that much for the benchmark degree for eight years. Tammo Diemer, chief executive of the financial agency, unveiled the issuance plans for the third quarter on Tuesday. In addition, € 106.5 billion will be placed on the capital market. Of this, € 53.5 billion is represented by capital market securities, which include federal bonds with a maturity of at least two years.

The short-term money market card, the so-called Bubills with a maximum maturity of twelve months, will be issued with a volume of 53 billion euros. The financial agency has slightly modified its long-term issuance plans: the volume of the increase of the federal loan to 30 years due in August 2048 scheduled for 10 August will be increased by 0.5 billion euros to 1, 5 billion euros. Furthermore, on September 14, the 30-year Federal Bond maturing in August 2052 will not be increased by EUR 1.5 billion as originally planned, but the 30-year Federal Bond maturing in July 2044 by EUR 1 billion. Finally, the inflation-linked bond maturing in April 2046 in the Confederation-owned portfolio will be increased by € 0.5 billion on 1 July to be able to flexibly meet any demand beyond the normal auctions.

Satisfied with the question

In the first half of the year, the federal government will place bonds worth € 224.75 billion. So far, 57 auctions have totaled € 205.25 billion. Of the remaining 19.5 billion euros, 8 billion euros were sold in syndication, with the rest being issued by the end of June. In the syndication process, the selected banks specifically target investors. However, this issuing process is more expensive than auctions, which is why the financial agency chooses this variant only for certain securities such as green federal bonds. Diemer was satisfied with demand in the first half of the year, even though the market environment was characterized by strong fluctuations.

The sell-off on the bond market illustrates the yield on the ten-year federal bond: in mid-December it was still minus 0.4 percent. Last Thursday it had risen to 1.923%. On Tuesday it was quoted at 1.74%. The price of the stock, which is considered fail-safe, is currently around 85%. Upon maturity, investors would receive 100 percent. In the bond market, falling prices guarantee rising yields, while higher prices depress yields.

Record losses in the bond market

Professional investors are already talking about a collapse in the bond market since the beginning of the year. It was the worst performance for safe-haven government bonds since 1999. Volker Schmidt, senior portfolio manager at Luxembourg-based asset manager Ethenea, also reported record losses on Tuesday. According to him, European bonds with investment grade, that is, in the area in which it is worth investing (rating of at least “BBB- / Baa3”), lost an average of more than 13 percent in the first six months of this alone. year. Two-year US government bond yields even quadrupled from 0.75% to over 3% year to date.

Schmidt believes further price losses and therefore an increase in US and European government bond yields by the end of the year are possible, although the magnitude of recent months is unlikely to repeat itself. The European Central Bank (ECB) is concerned about the significantly higher yield of Italian 10-year government bonds. This has risen to over 4% in the past week, but has since fallen to 3.6%.

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