Cablegate: German Finance Agency Issues Usd Bond

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 FRANKFURT 005048

SIPDIS

SENSATIVE

STATE FOR EUR PDAS RIES, EB, EUR/AGS, AND EUR/ERA
STATE PASS FEDERAL RESERVE BOARD
STATE PASS NSC
TREASURY FOR DAS LEE
TREASURY ALSO FOR ICN COX, HULL
PARIS ALSO FOR OECD
TREASURY FOR OCC RUTLEDGE, MCMAHON

E.O. 12958: N/A
TAGS: ECON EFIN EUN
SUBJECT: German Finance Agency Issues USD Bond

T-IA-F-05-030

This cable is sensitive but unclassified. Not/not for
Internet distribution.

1. (SBU) Summary: The German Finance Agency made news
with its first borrowing in US dollars since World War II, a
cool USD 5 billion. The move was taken in response to Asian
demand and to save money, but does not mark the beginning of
a regular dollar-borrowing program by the German Agency.
German Bunds continue to be a benchmark issue in a euro bond
market that has grown to be larger than the USD market. End
Summary.

First USD Borrowing Since WWII
------------------------------

2. (SBU) On May 24 the German Finance Agency made news
with its first borrowing in USD since World War II. The
German Finance Agency, formerly part of the Bundesbank, is
the borrowing agent for the German Government and reports to
the Ministry of Finance. The USD 5 billion, 5-year issue
was over subscribed with bids hitting USD 13 billion to
yield 12 points over comparable US Treasuries. Market
participants speculate there could be more such German USD
offerings in the pipeline.

3. (SBU) The head of the Agency explained to us that the
USD issue was undertaken to save the Finance Ministry money,
a principal objective of the Agency. During a spring trip
to Asia and the Middle East, he detected strong demand for
USD assets and a desire to diversify away from US Government
paper. Asian investors with whom he spoke thought the Euro
was over priced and expected the USD to recover. He
reported that, in the event, Asian investors purchased 60%
of the issue and 50% of the total went to central banks.
The low interest rate allowed the agency to save 13 million
euros, even after the issue was fully hedged so that it has
only euro liabilities.

Other New Features Yet to Come?
-------------------------------

4. (SBU) New euro sovereign borrowing techniques have
begun to attract attention. France has inflation-linked
bonds and in February issued a 50-year bond. The French
bond had an initial size of 3 billion euros but was doubled
when it attracted euro 19.5 billion in bids. The spread to
the 30-year French benchmark issue was a mere 3 basis
points, a feature that European Central Bank President likes
to cite as confidence in the long-term value of the euro.

5. (SBU) The German Finance Agency is likely to issue an
inflation-linked instrument and has just about completed the
necessary technical work, but the agency head doubts it
would produce any cost savings. Such instruments can be
cheaper than straight bonds in environments where
inflationary expectations are high but measured inflation
actually falls. Inflation expectations are low in Germany.
In fact, the Bundesbank never did an inflation-linked issue
as it would have conflicted with its stated objective of
price stability.

6. (SBU) He doubts the Agency would do a 50-year bond
issue. There is little liquidity in that segment. He
pointed out that most of the French issue was placed with
hedge funds, not long-term investors like pension funds.
That said, he agrees with the Bank for International
Settlement's (BIS) assessment that there has been strong
demand for longer-dated instruments. This reflects a desire
for higher yields and some recent supervisory requirements
for institutions, such as pension funds, to match better the
duration of their assets and liabilities. In fact, the
German Finance Agency has extended the maturity structure of
its borrowings, doing more 29- and 30-year issues than the
Bundesbank.

Growing Eurobond Market, but Still Obstacles
--------------------------------------------

7. (SBU) The euro bond market continues to grow and now
surpasses the US market, according to the agency head. BIS
statistics show that in 2003 and 2004 the value of the gross
issuance of euro-denominated international bonds and notes
topped those denominated in USD. In the first quarter of
2005, euro issuance of these instruments totaled $572
billion compared to $306 in USD. While gross euro issuance
is typically strong in the first quarter, the BIS notes this
year's extraordinary 22% advance reflected favorable
financing conditions to restructure balance sheets,
particularly in growing markets.

8. (SBU) However, the euro bond market for sovereign
issues is not really a unified market, according to the head
of the Agency. Some European countries offer tax breaks to
residents when they purchase local government bond issues,
others maintain a market- maker system requiring
participating banks to support their government issues by
providing liquidity in the market. The German Finance
Agency is unique in that it has no primary dealer system,
but buys and sells directly in the market and offers no
special features to traders. German bonds are the market
benchmarks and are much in demand. "I like competition," he
concluded.

9. (U) This report coordinated with US Embassies Berlin
and Paris and USEU.

10. (U) POC: James Wallar, Treasury Representative, e-mail
wallarjg2@state.gov; tel. 49-(69)-7535-2431, fax 49-(69)-
7535-2238

Bodde

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