Governments borrow money by selling bonds to investors. A
bond is an IOU. In return for the investor's cash, the government
promises to pay a fixed rate of interest over a specific period - say
4% every year for 10 years. At the end of the period, the investor
is repaid the cash they originally paid, cancelling that particular
bit of government debt. Government bonds have traditionally
been seen as ultra-safe long-term investments and are held by
pension funds, insurance companies and banks, as well as private
investors. They are a vital way for countries to raise funds.
Once a bond has been issued - and the government has the cash
- the investor can hold the bond and collect the interest every
year until it is repaid. But investors can also buy and sell bonds
that have already been issued on the financial markets - just like
buying and selling shares on the stock market.
The price of the bond will fluctuate as the outlook for
interest rates changes. So, for example, if the markets think
that interest rates are going to rise sharply, then the value
of a bond paying a fixed rate of 4% for the next 10 years will
fall. Bond prices will also fall if investors think that there is
a risk of the government that issued the bond not being
able to make the annual interest payment or repay it in full
on maturity - and these are the fears which have been
pushing down Spanish bond prices.
The bond yield tells the investor what the return on their
investment is, and can be calculated based on the current
price of the bond in the market. If a 100-euro bond is
paying 4% fixed interest - in other words, 4 euros per year -
and the bond can be bought for 100 euros, then the yield is
If the bond price falls to 90 euros, then the yield will rise.
That's because the investor is still getting paid 4 euros
every year, and 100 euros at maturity, which is a much
bigger return compared with the 90 euros they must put
down to buy the bond.
Because they determine what it costs a government to
borrow. When a government wants to raise new money, it
issues new bonds, and has to pay an interest rate on those
bonds that is acceptable to the market. The yield at which
the market is buying and selling a government's existing
bonds gives a good indication of how much interest the
government would have to pay if it wanted to issue new
German bonds are known as Bunds (from
Bundesanleihen). Bund maturities range from four to
thirty years. Other bonds, such as five year federal notes
“Bobls” (from Bundesobligationen); two year maturity
federal Treasury notes “Schatze” and Federal savings notes
(Bundesschatzbriefe) are also purchasable by individuals.
Inflation-linked German Government Bonds have been
added recently to bond market offerings. In German
bonds, the practice is to treat each month of the year as
having 30 days for purposes of calculating accrued interest.
There are various tax provisions related to German bonds,
including a withholding tax on interest for most investors.
The German Government Bond issuance is considered
a “gold standard” or benchmark in Europe (even after
the creation of the Euro). In Germany, the bond
market for individual investors is not significantly
“direct”, that is, although the individual investor in
Germany has significant amounts of bonds in his/her
overall asset holdings, most of the activity is not by
purchasing individual bonds but rather by holding
bonds through mutual funds and in “insurance”
products, i.e. pension and retirement funds, burial
Bonds are about 2/3 of the total amount of securities
outstanding in bonds and shares
About 60% of the German bond market is government
bond debt, 29% is corporate, and 11% is asset-backed
Bond markets are open to both institutional and individual
investors, but there is much more participation generally
by institutional investors than individual investors.
German individual investors in bonds represent less than
5% of the direct investment in the German bond markets.
The majority of bond market participants in Germany are
institutional investors, such as pension funds, insurance
companies and banks.
In Germany, individual investor holdings of bonds
comprise between 10-15% (in 2004, some €5,800)
In Germany, individual investors prefer to invest in
bonds directly while in other European countries such
investments take place primarily through funds.
German Pfandbriefe were taken as a model in several European
countries when legal frameworks were reformed in the late 1990s
to enable the issuance by certain financial institutions of similar
instruments secured on portfolios of mortgage loans. The high
credit quality of mortgage Pfandbriefe, generally a triple-A rating
from at least one rating agency, stems from some key features:
first, a well-established regulatory framework, which was revised
in July 2005 (see Appendix II for details); second, the quality of
the collateral pool, which must be covered by related assets of at
least an equal amount and yield; third, the high quality of the
cover pool encompassing first ranking mortgages with LTV ratios
no higher than 60 percent; and fourth, in case of the bankruptcy
of the issuer, the privileged position of Pfandbriefe holders is
guaranteed by a statutory preferential right and the separation of
the cover pool (administered by an independent trustee).
There is an exception to this general positive trend. In
September 2005, one of the main issuers of mortgage
Pfandbriefe, Allgemeine Hypotekenbank Rheinboden
(AHBR), was on the brink of bankruptcy. This was the
result of a protracted period of financial difficulties on
account of the mismanagement of its fixed income loan
book. The markets reacted strongly to the critical situation
of AHBR and the issuer was downgraded to non-
investment grade (from single A). The spreads for its
mortgage Pfandbriefe increased from nearly zero to about
15 basis points. After AHBR was taken over by a U.S.
Financial investment company and following the
announcement of the restructuring plans in January 2006,
the spreads seem to have stabilized. It is worth noting that
while AHBR’s rating was severely downgraded, its covered
bonds remained highly rated (AA-AAA) throughout this
Ten and thirty-year Bunds represent the long end of the
German Government yield curve. At year-end 2012 they
account for about 60% of the Federal Government’s debt
portfolio. In 2012 ten-year Bunds comprised again 22 % and
thirty-year Bunds about 3% of the annual issuance volume.
In 2013 three new ten-year Bunds with maturities in
February, May and August 2023 and a volume of € 5 billion
will be issued for the first time. Each one will be reopened
three times with volumes of € 5 billion and thereafter two
times of € 4 billion. At year-end all three issued Bunds will
reach a total outstanding volume of € 18 billion
In the secondary market for German Government
securities Bunds accounted for a total share of over 50% of
trading volume and for over 10% of the net volume, based
on the absolute positions (purchases less sales) of
reporting member banks of the Bund Issues Auction
Group. Since many years ten-year Bunds are the flagship
product at the secondary level of the German Government
Characteristics: Redemption at par; interest calculated on
an actual/365 or actual/366 basis; not redeemable
prematurely and not callable by the issuer.
Since on January 1st, 2013 new issuance terms and
conditions came into effect Federal bonds imply new
standardised maturity dates on February 15th, May
15th, and/or August 15th.