Germany May Start Reducing Bonds Outstanding as Soon as 2015

Chancellor Angela Merkel’s government plans to start reducing the amount of German sovereign bonds outstanding from as early as next year as it seeks to deliver on a 2013 election promise to stop adding new debt.

Gross federal borrowing will drop to 189.4 billion euros ($253.2 billion) in 2015 from 206.1 billion euros this year, according to a Finance Ministry report submitted to parliament in Berlin. Net new borrowing is projected to drop to zero from 6.5 billion euros in 2014.

“Net bond issuance may even become negative by 5 billion euros to 6 billion euros next year if the federal government keeps the current stock of short-term debt unchanged,” said Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London. That’s based on 2015 bond redemptions of 155 billion euros, he said.

The prospect of shrinking supply in Europe’s benchmark government debt may add scarcity to a list of reasons from slowing inflation to haven demand that’s helped push down 10-year yields to a record this month. Germany sold 3.3 billion euros of 10-year debt at a record-low auction yield yesterday.

Benchmark 10-year yields declined two basis points, or 0.02 percentage point, to 1.01 percent at 9:33 a.m. London time after touching 0.998 percent, the least since Bloomberg began tracking the data in 1989.

At yesterday’s auction, the bunds drew an average yield of 1.08 percent. Germany last sold 10-year debt on July 16 at a rate of 1.20 percent.

“The present government draft of the federal 2015 budget is the first since 1969 in which the federal budget is in balance without new borrowing,” the Finance Ministry said in the report. “With this precautionary fiscal policy, the federal government is well equipped to confront the demographic challenges already emerging.”

Germany’s population will probably decline to around 73.6 million people by 2050 from around 82 million at present, the government predicts. The number of pensioners to be supported by 100 people at working age is expected to rise from 34 in 2008 to between 63 and 67 by 2060, depending on immigration policies.