Twin Concept

German government securities serve as benchmark for fixed income instruments in the Euro area. The issuer on federal level, the Bund, is seen as highest credit quality and is well-known for its high tradability, transparency and reliability. German Government securities are issued almost every week. Issuance is mainly conducted by auction. Auction days in general are Monday, Tuesday and Wednesday.

In 2020, the Federal government has announced its ambition to establish a comparable interest rate reference for the Euro green finance market as well. To this end, a green Bund curve is to be gradually established. Therefore, the Bund issues green German Federal securities in addition to its traditional securities. Starting in September 2020. These green Bunds are part of the German government’s sustainability strategy, aiming to promote transparency and sustainability in the financial industry’s decision-making process.
Let’s have a closer look at the process of the issuance of the green Bunds:

All green German Federal securities will be issued in a similar way as conventional bonds. They are constructed as so-called twin bonds.
This means: each green Federal Security has a conventional twin on its side – with both, the same maturity date and the same coupon. For the very first issue of a green German Federal security, a 10-year bond in September 2020, a syndicate was chosen to bring the bond to the market. All further issues will likely be conducted via the well-known auction process.
Green Bunds will be issued frequently and are fully integrated in the issuance schedule.

The maturity segments for the green issues are predefined by the standard tenors of the conventional medium and long-term federal securities which are 2, 5, 7, 10, 15 and 30 years.
While a conventional bond is issued with the promise to pay interest and principal repayment at maturity... the green twin additionally comes along with the promise to deliver a high transparency regarding the underlying green expenditures. This means, the green twin will get an allocation reporting for green government expenditures and later on an impact reporting.
For more details on this matter please watch our video about the green elements of the green Bunds.

What are the twin’s terms and conditions - the conventional one and the green twin?
Identical to both twins are:

• The maturity date, for example August 15th, 2030, which results in an identical tenor of for example 10 years for both securities.
• The coupon or annual interest payment, for example 0.25 %.
• The interest payment date and rhythm, for example August 15th, annually.

Different for each twin are the issuance volume. The conventional twin could finally have a total issuance volume of for example € 25 bn, the green twin for example of just € 5 bn.
The first pricing or settlement date is different as well. The conventional twin is issued much earlier in the calendar year than the green twin, which might lead to a first pricing date for the conventional twin of for example June, 17th, whereas the green twin has its first pricing date
much later on, let’s say September 20th, of the same year.
The ISIN also differs between the twins. This, of course, means: both securities are separate securities. They can be held and traded separately and independently from each other. Thus, there is no obligation for investors to buy, hold and sell both securities at the same time.

Let us now take a look at the timing of issuing the conventional twins.
The conventional Bund is always born first. The first issue usually happens by an auction process. Then, within a timespan of some weeks or a few months it is reopened or tapped several times. In this example three times. Tap 4 in this example is another tap of the conventional bond, but a special one. The reason: the green security is born and issued into the market.
Whereas the green security is sold to banks via auction or directly to market participants via syndicate, the conventional bond is issued into the own stock of the Federal government. Initially, this tap-amount of the conventional security is fully kept in the vaults of the Federal government.

From the day of the first issuance, a secondary market price for the conventional twin has been in existence. From the day of the first issuance of the green twin bond, a second price comes into existence for the new green security. Since the conventional and the green twin have exactly the same cash-flows, they may develop very similar price levels on the secondary market.
A reason for price differences between almost identically looking financial instruments might be the higher outstanding volume of one of the two. A high outstanding volume can foster a high trading volume. In general, investors are willing to pay a so-called liquidity premium. This happens, if investors know, that a security is much easier to sell and to liquidate under difficult market conditions or in critical market environments than other instruments are. This is expressed by a higher price and a lower yield of the respective instrument in comparison to other less liquid investment instruments.

Another fact which should lead to a relatively high price of green German Federal securities, is the higher transparency regarding green expenditures and the obligatory allocation and impact reports. Regarding these additional services and in view of a generally high demand for very safe green government bonds, investors might be willing to pay a premium above the price of the conventional twin. From the issuer’s perspective, higher transparency and a relative strong demand for green securities should at least warrant an equal pricing for green Federal securities compared to their conventional twins.

On the secondary market, the German Finance Agency will perform its activities established for conventional Federal securities for their green twins as well. The twin bond concept and a significant additional amount of own holdings in conventional bonds will facilitate combined and debt-neutral sale-and-purchase transactions between both bonds, so-called switch trades.
Also possible are outright sale and purchase transactions by the German Finance Agency. Repurchase agreements and securities lending might be conducted by the German Finance Agency with the green twins as well. Thus, to ensure secondary market tradability comparable to conventional German Federal securities, the German Finance Agency will play an active role in the secondary market for green German Federal securities.

This should result in a liquid green Bund curve, established within a short period of time and therefore, a pricing reference for other, Euro-denominated green bonds. Market participants with short- and medium-term, as well as long-term investment horizons will have a green, transparent investment opportunity with highest credit quality at their disposal. This will exhilarate the development of sustainable finance markets in the euro area and to track new investors to the green bond market.