Liquidity Protection

On the one hand, borrowing requirements arise from the refinancing of maturing Federal securities - as a result, the debt level remains unchanged. On the other hand, additional new borrowing in the context of net new debt can increase the debt level.

In addition to this rather long-term financing, the Federal government must also ensure its liquidity during the year, e.g. provide funds required for the federal budget on time. Since the Federal government’s cash requirements vary from day to day, for example, tax revenues are also received unevenly in the Federal budget, the Federal Government's cash balance fluctuates and must be balanced daily. The Federal government's account with the Deutsche Bundesbank must not have a negative balance at the end of the day.

Balance Between Costs and Risks

Interest payments on the Federal government's debt constitute a significant block of expenditure in the Federal budget. For reasons of economic efficiency, these interest costs should be kept as low as possible. In a normal market environment, the level of interest rates on loans is related to the term of the loan or the term of the securities used to finance it. The following applies given a 'normal' interest rate curve structure:

• The shorter the term, the lower the interest costs.
• The longer the term, the higher the interest costs.

However, the question of costs must always be seen in the context of the associated risks. In addition to sales risk and liquidity risk, the debt management strategy also considers interest rate risk. The interest rate risk is also closely related to the maturity of the securities used for financing - but in the opposite direction:

• The shorter the term, the higher the risk, as the loan amount will soon have to be refinanced at an interest rate unknown today.
• The longer the term, the lower the risk, because the longer the interest terms of the debt are also fixed. A refinancing requirement that lies further in the future increases planning security today.

Cost and risk combinations of Federal securities: A short maturity and thus fixed interest rate of the securities promises lower interest costs, but is accompanied by a higher refinancing risk. A long maturity or fixed interest rate reduces the refinancing risk, but results in higher interest costs from the start.

From the Optimal Debt Portfolio...

From the borrower's point of view, it is obvious for reasons of interest cost savings to obtain financing with the shortest possible fixed interest rate (= issuing bonds with short maturities) due to the usually comparatively low interest rates in the short maturity range. However, this strategy entails the considerable risk for the issuer of sharply rising interest rates within a short period of time and thus a rising interest burden. The old bonds mature after a few months and new ones have to be issued with ever higher interest rates. On the other hand, the short fixed interest period also offers the opportunity to reduce financing costs if interest rates remain the same or even decline.

In contrast, long fixed interest periods with relatively precisely calculable interest costs over years or decades ensure greater planning security from the borrower's point of view. However, in case of a „normal” interest rate structure, the long fixed interest period goes hand in hand with long bond maturities and thus higher interest rates and costs from the outset.

With a view to a balanced interest cost and risk structure in the debt portfolio, it therefore makes sense, in view of an interest rate development that cannot be predicted with certainty in the future, to distribute the fixed interest period of the Federal debt as evenly as possible over short, medium and long maturities. The Federal government does not take on above-average risks and on average achieves an interest cost burden that lies between the low interest rates at the short end and the relatively high ones at the long end. The Federal government therefore has a great interest in continuously issuing securities whose maturities span the entire spectrum from 12 months (Bubill) to 30 years (Bund).

...With a View to Investor Needs...

A broadly diversified offer meets comparatively concentrated demand on the market: The potential buyer groups usually prefer certain maturity segments and are not interested in a broadly diversified portfolio of Federal securities across all maturities due to their specific investment objectives. Pension funds and insurances, for example, tend to demand very long maturities, while money market funds or central banks prefer very short maturities. Many fixed-income funds, on the other hand, prefer the medium range.

Since the cumulative demand of the potential buyer groups is not distributed exactly evenly across all maturity segments, deviations arise between the desired supply structure of the Federal government and the potential demand constellation. In addition, the respective market situation (current yield and expected yield) and the remaining time of the hedging instruments available on the market (such as Bund futures) have a significant influence on the demand situation.

Aligning the issuance of securities with the issuer's targeted debt portfolio could permanently damage its benchmark status and is therefor only sensible within certain limits. On the other hand, alignig the supply of securities with demand alone may, over time, result in a debt portfolio that does not match the issuer’s cost and risk preferences.

... to the Annual Issuance Calendar

When drawing up the annual issuance calendar, therefore, several very different aspects have to be taken into account. Although it is intended to contribute in the best possible way to achieving the cost and risk structure aimed by the Federal government, in the end the the primary orientation toward the needs of the demand side usually results in an issuance calendar that does not optimally complement the existing debt portfolio. 

The Finance Agency is granted access to the swap market for this reason by the Budget Act. Through supplementary swap transactions, the demand-driven issuance structure can thus be transformed into a maturity structure that is more appropriate for the Federal government from an interest cost and risk perspective. In this process, the interest rate risk profile of the existing debt portfolio is analysed as a whole in a first step, compared with the optimal interest cost and risk structure from the perspective of the Federal government. Then the deviations between the target and actual structure are eliminated as far as possible through swap transactions. The optimal portfolio structure thus results from taking into account the risk associated with the swap transaction and issuance.

At the end of 2023, the gross volume of swap contracts concluded by the Federal Government (= excluding netting effects) amounted to a total of € 258.2 bn. This corresponds to a portfolio reduction of € 75 bn over the course of 2023. All payer and receiver positions (transactions paying or receiving a fixed interest rate) for money and capital market swaps were recorded.

The Fixed Interest Periods of The Federal Government

Fixed interest periods of the Federal government and its special funds with and without interest rate swap transactions in years; methodological note: Due to the increasing influence of inflation-linked Federal securities, their percentage weighting in the average portfolio term is limited to 75 % according to a study of experience by the Finance Agency. This takes into account the monthly fixed interest rate of the index portion of the otherwise fixed interest coupon.

Legal Boundaries & Risk Management

In order to limit counterparty risks, in order to limit counterparty and, in particular, market price risks arising for the Federal government from swap contracts, a maximum volume for these transactions is stipulated each year in the Federal Budget Law. At present, new swap transactions within a calendar year may lead to a maximum increase of the total swap portfolio by € 80 bn.

These, as well as a multitude of other risks and limits, are monitored and reported to the Federal Ministry of Finance using a risk management system developed specifically for this purpose. In addition, the Finance Agency applies the MaRisk for the risk management of the debt portfolio analogous to banks, which requires, among other things, the reporting of the market price risk of the entire portfolio as well as the limitation of risks in all activities. Other types of risk, such as counterparty risk in individual cases and operational risks, are downstream of portfolio management and are generally minimised.

Diversification in Debt Management

The tasks of debt management and thus of the Finance Agency also include the introduction of new financing instruments for the Federal government for use on the money and capital markets. The primary goals are to leverage additional potential for interest cost savings, improve diversification, create even more efficient ways of borrowing, and tap new investor groups.

The main innovations issued so far have been inflation-linked Federal securities, foreign currency bonds denominated in US dollars and green Federal securities. In contrast to foreign currency bonds, for which the Federal government pursues a rather opportunistic issuing approach due to the interest rate advantages that are very rarely available on the market, inflation-linked as well as green Federal securities have meanwhile become a fixed part of strategic issuance planning.