Amount set aside for secondary market operations
In every auction a portion of the announced issuance volume is retained by the Finance Agency, with most of it sold afterwards in the secondary market. These retained securities can be used to collateralise repurchase agreements (repos) or interest rate swaps or be used in securities lending. The volume of securities retained for secondary market operations varies from auction to auction. Since 2006, the retained amount has averaged about 20 % of the issuance volume (which also includes money market papers and inflation-linked securities):
(accum., in % of issuance volume)
The retention quote in auctions usually accounts for less than 20 % of the issue volume. Overall, the amount held by the Finance Agency is fixed by law at 10 % of the securities in circulation.
The amount of own securities that can be held for credit authorisations is regulated in § 2 (5) of the Federal Budget Act. The volume of own securities should not exceed 10% of the volume of the Federal bonds, Federal notes, Federal Treasury notes and Treasury discount papers in circulation.
Activities on the secondary market
Whereas the Deutsche Bundesbank acts as market maker for German Government bonds on the German securities exchanges, the Finance Agency supports market makers on electronic trading platforms and in the OTC market with the retained amounts. The agency’s bond holdings can also be sold or purchased in the spot market as part of the German Federal Government’s liquidity planning. Secondary market trading also enables members of the Bund Issues Auction Group to conduct transactions directly with the issuer if necessary. The spot transactions are supplemented by repo transactions and securities lending. The Finance Agency generally executes its secondary market transactions with a minimum impact on the market and in line with market prices to avoid giving rise to or reinforcing any market trends.
Aim of secondary market activities
Secondary market activities help spread the timing of financing activities and can be used to collateralise interest rate swaps or repos as well as for securities lending and supporting market makers.
While the Finance Agency's own secondary market activities supports the smooth trading in German Government securities, its participation in the secondary market also provides it with a daily direct insight into the current supply and demand situation for German Government securities.
The combination of spot transactions and repo trading provides a particularly high level of information which can be channelled into the structuring of the issuance calendar and the auction allotment decisions. In addition, selling off the portion retained at the auctions in the secondary market enables the Federal Government to better spread the timing of its financing activities, which, in turn, helps to reduce its financing costs. The use of the Finance Agency’s own holdings of German Government securities, in cooperation with numerous international banks, contributes indirectly to fair market pricing and successful primary market placements.