GERMANY – German pension funds have been reflecting on the news that Germany plans to issue its first ever inflation-linked bonds in the near future.
The Finanzagentur, which is the government’s treasurer, has confirmed the plans, which first surfaced in an interview.
The agency gave no timeframe for the sale of the bonds, saying only that the government had empowered it to do so in the federal budget for 2006. It added that, in a departure from normal practice, it would have banks underwrite the sale.
“We want to link the bonds to European inflation so that we can attract international investors. We don’t know the investor base, so we need the support of banks,” Finanzagentur head Gerhard Schleif told Bloomberg news agency in a recent interview.
Citing market sources, Bloomberg also reported that the Finanzagentur could issue Germany’s first inflation-linked bonds by the end of the first quarter of 2006.
Experts say inflation-linked bonds, which have a maturity of at least 10 years, are attractive to liability-driven investors like pension funds, because they aim to protect initial investment volumes from the effects of inflation.
Other European countries like the UK, France and Italy are well ahead of Germany in offering inflation-linked bonds. Just last September, the UK issued, through a network of banks, inflation-linked bonds with a maturity of 50-years.
Yesterday, the Bank of England said UK pension funds were are buying index-linked gilts at virtually any price because of being caught in a vicious circle of falling yields and falling funding ratios.
Recent research from Goldman Sachs in London also suggests that pension funds worldwide will need to buy €2trn worth of bonds with a maturity of more than 10 years to meet their long-term liabilities.
But two major German pension funds queried by IPE said they currently did not have inflation-linked bonds in their portfolio and had no immediate plans to buy them.
A spokesman for Bayerische Versorgungskammer, Germany’s largest pension fund with €30bn in assets, said the bonds were currently not interesting from an interest rate perspective.
“We are, however, watching events closely and we might change our position if the interest rate situation changes,” he added.
Professor Dirk Lepelmeier, managing director of Nordrheinische Ärtzeversorung, a €7.5bn medical pension fund, said his fund had well protected itself against inflation.
“We’ve done this by investing in real estate, which accounts for 15% of our assets and by raising our exposure to commodities via futures,” Lepelmeier told IPE from Düsseldorf.
According to him, commodities could account for up to 3% of NAEV’s assets in 2006.