Germany and France are trimming borrowings next year as Chancellor Angela Merkel’s government attempts to return debt sales to pre-crisis levels and President Francois Hollande reins in his country’s budget deficit.
Germany will sell 250 billion euros ($331 billion) in bonds in 2013, 5 billion euros less than this year, the Federal Finance Agency said today. France will cut borrowings by 9 billion euros to 169 billion euros, Agence France Tresor said.
The euro-area’s two largest economies are restricting bond sales as they brace for slower growth in the currency union. France’s plan marks the third consecutive reduction following a debt issuance peak of 188 billion euros in 2010, reflecting Hollande’s pledge to cut the deficit to 3 percent of gross domestic product next year. The German economy may contract this quarter, according to Bundesbank forecasts, pushing up rates after investors showed a willingness to accept record-low yields on new German bonds this year.
“This is a good sign that perhaps we have seen the worst in terms of fiscal stress in the region,” said Michael Leister, a fixed-income strategist at Commerzbank AG in London. “The reduction in issuance will be positive for the market and we hope the trend will continue. Weak growth is the biggest risk facing the region as it may derail fiscal reforms and push up borrowing needs again.”
Germany sold a record 334 billion euros of debt in 2009, up from 220 billion euros a year earlier, as the economy sagged following the collapse of Lehman Brothers Holdings Inc.
Europe’s largest economy will issue 173 billion euros in bonds and 77 billion euros in bills in 2013, the agency said. In the first quarter it will sell 44 billion euros in bonds and 21 billion euros in bills. The Federal Finance Agency plans to redeem 215 billion euros in maturing bonds in 2013.
Germany will issue as much as 12 billion euros in inflation-linked bonds next year, test a novel debt instrument dubbed Deutschland bonds in combination with the country’s states, and stamp all new debt issuance from January with collective action clauses in line with policy adopted by all euro-area states.
Germany’s 10-year bond yields fell two basis points, or 0.02 percentage point, to 1.41 percent at 4:02 p.m. London time. Inflation-protected bonds rose, pushing the yield on 10-year securities down two basis points to minus 0.30 percent. Yields on 10-year French securities dropped three basis points to 1.99 percent.
Selling fewer bonds in 2013 and focusing more on the 5-year segment where the agency can expect to pay lower interest is “good for Germany and the wider market,” Ciaran O’Hagan, head of European interest-rate strategy at Societe Generale SA in Paris, said in an interview.
Merkel last month agreed to free Greece from paying interest worth 2.74 billion euros to Germany on bonds bought by the European Central Bank. This year, the government re-opened the budget to raise 6 billion euros in temporary new credit for installments to the euro-area’s permanent rescue fund. In total, Germany has guaranteed 142 billion euros in bilateral or fund-linked loans in the crisis, the Finance Ministry said.
Incorporating the burden in its assessment, Moody’s Investors Service on July 23 placed Germany’s outlook on negative and two days later put 6 German states on the same negative from stable. On Dec. 1, the company downgraded both of the euro’s rescue funds in which Germany holds the biggest stakes, citing a “high correlation in credit risk.”
The finance agency expects interest paid on its sovereign debt portfolio of about 1.1 trillion euros to rise in average terms from the 3.6 percent paid this year. The agency said today that average yields on new bonds were 0.56 percent this year, a record low.
The agency will sell inflation-linked bonds next year every month bar August and December, expanding its current outstanding securities of five- and 10-year debt to more than 55 billion euros. Germany hasn’t ruled out a possible sale of a 30-year index-linked bond for the first time although the agency didn’t refer to them today.
German bonds returned 3.7 percent this year while the country’s index-linked securities gained 4.2 percent, according to Bank of America Merrill Lynch indexes.
The federal government and states that choose to participate will sell a joint bond -- dubbed the Deutschland Bond -- in 2013, the agency said, without being more specific. Liability will be limited to each participant’s share of the nominal value of the bond, the agency said.