Germany will sell 30-year inflation-linked bonds for the first time amid signs the European Central Bank’s loose monetary policy is reviving price growth.
The Federal Finance Agency, Germany's debt management office, on Wednesday named Commerzbank, Credit Agricole, Goldman Sachs Group, HSBC Holdings and Societe Generale as joint lead managers of the sale, which will total as much as €2.5 billion. The bonds are expected to be offered in the coming weeks, said a person familiar with the matter.
"Investors may have underestimated long-term inflation risk," said Michael Althof, a money manager at Pacific Investment Management Co. in Muunich. "We will participate if the price is right. I envisage the bond to be sold at negative real yields, but it will still be attractive to pension funds."
The new bond will give the German government a full spectrum of inflation-linked debt. It began selling bonds tied to the inflation rate in 2006 and said it currently has six maturities in the market. “It is intended to increase the bond with several taps to a total nominal value of greater than €10 billion,” the FFA said on its website.
The yield on German index-linked bonds due in April 2030, currently its longest maturity, rose seven basis points, or 0.07 percentage point, to minus 0.27 per cent as of 1 p.m. London time, the highest on a closing basis since January.
Yields climb
Germany’s 10-year break-even rate, a market gauge of the inflation outlook derived from the yield difference between conventional and index-linked bonds, has climbed to 1.2 percentage points, from a low for this year of 0.54 in January. The ECB’s target is to push annual inflation -- 0.3 percent in May -- to just below 2 percent. The decision to offer 30-year index-linked bonds wasn’t related to the ECB’s quantitative-easing program and predated the announcement of that plan in January, said Tammo Diemer, the FFA’s managing director in Frankfurt.
Not every investor will be attracted by the new bonds, given the low level of Germany's so-called real yields, or yields adjusted for inflation. The long duration will make them more vulnerable to losses if yields rise, according to Mark Nash, a portfolio manager at Invesco Asset Management Ltd. which oversees about $768 billion. "Inflation protection is good, but the duration component is a concern," said London-based Nash.
Euro-zone index-linked bonds outperformed their nominal counterparts so far in 2015, returning 2.2 per cent after lagging behind in the past two years, according to Bank of America Merrill Lynch bond indexes. Nominal securities rose 0.13 per cent.
Bloomberg
