The sell-off on the bond markets triggered by high inflation is now reaching the federal budget in the form of higher interest payments.

And here the curve is pointing steeply upwards: Finance Minister Christian Lindner (FDP) is planning interest payments of 16.3 billion euros for this year and 30 billion euros next year.

That is significantly more than in the two previous years: in 2020 the federal government had to spend 6.5 billion euros on interest on its debt securities and in 2021 almost 4 billion euros.

Markus Fruehauf

Editor in Business.

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The interest rate turnaround is also felt by the finance agency responsible for debt management in its issuance planning for the third quarter: the new ten-year federal bond will be equipped with an interest coupon of 1.7 percent on July 6th.

The federal government has not had to pay that much for the reference title for eight years.

Tammo Diemer, Managing Director of the finance agency, presented the issuance plans for the third quarter on Tuesday.

Furthermore, 106.5 billion euros are to be placed on the capital market.

Of this, 53.5 billion euros are accounted for by capital market paper, which includes federal bonds with a term of at least two years.

Short-term money market paper, i.e. so-called Bubills with a maximum term of twelve months, is to be issued with a volume of 53 billion euros.

The finance agency has changed its issuance plans at the long end somewhat: the volume of the increase in the 30-year federal bond due in August 2048 planned for August 10 will be increased by EUR 0.5 billion to EUR 1.5 billion.

In addition, on September 14, the 30-year federal bond maturing in August 2052 will not be increased by EUR 1.5 billion as originally planned, but the 30-year federal bond maturing in July 2044 by EUR 1 billion.

Finally, the inflation-indexed bond maturing in April 2046 in the federal government's own portfolio will be increased by 0.5 billion euros on July 1,

Satisfied with demand

In the first half of the year, the federal government will place bonds worth EUR 224.75 billion.

So far, 57 auctions have accounted for 205.25 billion euros.

Of the remaining 19.5 billion euros, 8 billion euros were sold in syndication, with the remainder being issued by the end of June.

In the syndicate process, selected banks specifically address investors.

However, this issuance process is more expensive than auctions, which is why the finance agency only chooses this variant for certain titles such as green federal bonds.

Diemer was satisfied with the demand in the first half of the year, even if the market environment was characterized by major fluctuations.

The sell-off on the bond market illustrates the yield on ten-year Bunds: in mid-December, it was still minus 0.4 percent.

Last Thursday it had risen to 1.923 percent.

On Tuesday it was listed at 1.74 percent.

The price of the title, which is considered fail-safe, is currently hovering around 85 percent.

At maturity, investors would receive 100 percent.

On the bond market, falling prices ensure rising yields, while higher prices depress yields.

Record losses in the bond market

Professional investors are already talking about a crash that has taken place on the bond market since the beginning of the year.

It was the worst performance for safe-haven government bonds since 1999. Volker Schmidt, senior portfolio manager at Luxembourg-based asset manager Ethenea, also reported record losses on Tuesday.

According to him, European bonds with investment grade, i.e. in the area worth investing in (ratings of at least "BBB-/Baa3"), lost an average of more than 13 percent in the first six months of this year alone.

Yields on two-year US government bonds have even quadrupled from 0.75 percent to more than 3 percent since the beginning of the year.

Schmidt believes further price losses and thus rising yields for American and European government bonds are possible by the end of the year, even if the extent of the past few months is unlikely to be repeated.

The European Central Bank (ECB) is concerned about the significantly higher yield on Italy's ten-year government bonds.

This rose to more than 4 percent in the past week, but has since fallen to 3.6 percent.