Germany is to increase the size of its inflation-linked bond market, seizing on growing demand for assets that protect investors from rising consumer prices.
The German Finance Agency aims to issue another €3.5bn of its 10-year inflation-linked bond to bring the outstanding size to €9bn. When Germany launched the bond this year with a €5.5bn issue, it said it would return to the market regularly to increase the size of the issue to up to €15bn.
The transaction, due to be completed by the end of the week, is part of an effort by Germany to diversify its funding sources. Demand for inflation-linked bonds, or linkers, remains robust, in spite of the fast rate of global issuance.
Demand has been largely driven by pension funds and insurance companies, which seek low-risk assets to match liabilities and want to minimise the risk that future interest receipts could fall below inflation. But retail and hedge funds, among others, are also keen buyers.
“The linker has very much been in vogue in the past few years,” said one banker involved in the deal. “The product has had an enormous growth in the euro as well as other currencies because of the global focus on inflation as something that either needs to be hedged or that investors want exposure to.”
Of the €3.5bn to be issued by Germany, €3bn will be placed with investors and the rest kept by the Finance Agency to ensure liquidity in the secondary market, banking sources said.
Germany has mandated Deutsche Bank, JPMorgan, Morgan Stanley and Societe Generale to manage the deal. Germany is rated AAA, the highest credit rating, by Fitch Ratings, Moody’s Investors Service and S&P.