The main aim of debt management is to keep interest costs as low as possible across a number of years and market phases while limiting the interest rate risks resulting from the portfolio structure.
From the optimum debt portfolio...
To optimally balance a portfolio, the interest cost savings achieved through the issue of securities that are as short dated as possible must be weighed up against the certainty provided by very long-term instruments. This requires a debt portfolio with a balanced maturity structure.
From the perspective of the borrower, in order to save interest costs it is best to obtain financing at the short end of the yield curve where interest rates are generally comparatively low and to commit to as short a fixed interest rate period as possible (= issuance of bonds with short maturities). However, this strategy entails for the issuer the considerable risk that interest rates might rise significantly within a short period of time, thereby incurring rising interest costs. The old bonds will mature in just a few months and be replaced with bonds with ever increasing interest rates. However, the short fixed interest rate period also provides the borrower with an opportunity to lower financing costs if interest rates remain the same or even fall.
Long fixed interest rate periods, in contrast, provide the borrower with interest costs that can be calculated relatively precisely years or decades in advance as well as a high degree of planning certainty. However, a long fixed interest rate period is associated with a “normal” interest rate structure with long bond maturities and higher interest rates and costs from the very onset.
Daily updated remaining term to maturity of tradable German Government securities
In the interests of ensuring a balanced interest cost and risk structure in the debt portfolio, it is therefore sensible to distribute the fixed interest rate periods for Federal Government debt as equally and across as many different maturities as possible, given that it is not possible to predict future interest rate movements with any certainty. In this way the Federal Government does not enter into any excessive risk and achieves an average interest cost burden between the low rates at the short end of the curve and the relatively high rates at the long end. As part of its debt policy, the Federal Government is therefore very interested in issuing securities on an ongoing basis, with maturities that are spread across the entire spectrum ranging from less than 12 months to over 10 years.
...with a view to investor requirements...
However, there is only comparatively concentrated demand on the market for such a broadly diversified offering. Potential buyer groups usually prefer certain maturity segments and given their individual specific investment goals are not interested in a broadly diversified portfolio of German Government securities spanning all maturities. Pension funds and insurance companies, for example, require very long maturities, while money market funds or central banks prefer very short maturities. Many bond funds, in turn, prefer the middle ground.
As the cumulative demand of all potential buyer groups is not distributed equally across all maturity segments, there are discrepancies between the structures that investors would prefer to be offered by the Federal Government and those for which there is a potential demand. Furthermore, the prevailing market conditions (actual return plus return expectations) and the reference maturity of the hedging instruments available on the market (e.g. Bund futures) have a significant impact on the demand situation.
...to the annual issuance calendar
The issuance programme's focus on the needs of investors makes the use of swap transactions necessary to achieve the optimum maturity structure for the Federal Government. A statutory limit applies to swap transactions.
A number of very different aspects must therefore be taken into consideration when compiling the annual issuance calendar. What emerges is an issuance calendar that usually does not ideally supplement the existing debt portfolio in terms of the Federal Government's interest cost and risk targets given that it needs to be based around the needs of potential buyers.
For this reason, the law permits the Finance Agency to access the swap market. This means swap transactions can be used to convert the demand-oriented issue structure into a maturity structure that is appropriate for the Federal Government, taking due account of interest costs and risk aspects. In this process, the interest risk profile of the existing debt portfolio is first of all analysed as a whole, compared with the interest cost and risk structure that would be ideal for the Federal Government, before using swap transactions to eliminate as many discrepancies as possible between the targeted and the actual structure.
As at the end of 2018, the gross volume (= excluding netting effects) of swap contracts concluded by the Federal Government totalled € 262.3 bn. During the year the volume of the swap portfolio increased by a gross amount of € 13.0 bn. This includes all payer and receiver positions (transactions involving payment and receipt of a fixed interest rate) for money market and capital market swaps.
The Federal Government's fixed interest rate periods
Fixed interest periods (in years)
|Medium fixed-interest period |
with interest swaps
|Medium fixed-interest period |
without interest swaps
Each year the Federal Budget Act defines a maximum volume for swap transactions to limit the Federal Government's exposure to counterparty and market price risk arising from swap contracts. At present, newly concluded swap transactions within a calendar year may not result in an overall increase in the swap portfolio of more than € 80 bn.
Additional debt management components
New financing instruments are developed and issued to help further diversify the Federal Government's debt portfolio.
One of the responsibilities involved in debt management and thus of the Finance Agency is to develop new financing instruments to be used on the money market and capital market. The main goals are to leverage additional interest cost savings potential, improve diversification and create even more efficient borrowing avenues. Key capital market innovations of recent years have been the issue of inflation-linked Federal notes and bonds as well as USD-denominated bonds. Unlike foreign currency bonds, with which the Federal Government adopts a rather opportunistic issuance approach due to the very infrequent interest rate advantages available on the market, inflation-linked securities have now become a fixed part of the Federal Government's strategic issuance planning.