From 2023, No More Inflation-Linked Bonds from the German Government
The German Federal Finance Agency announced its decision to withdraw from the market for inflation-linked bonds starting next year. Beginning in 2023, no more inflation-linked federal securities will be issued, and no outstanding securities will be increased.
Currently, four securities known as linkers, with a total volume of 66.25 billion euros, are still tradable on the market. The remaining terms span around 2.5 to 22.5 years.
Inflation-indexed bonds provide investors with a means to hedge against inflation risks. By investing in these securities, they can safeguard their capital, at least partially, against rising inflation, which is currently surpassing levels seen in the past decade. Although linker bonds have historically remained in the shadows, their relevance has increased in recent years.
Tammo Diemer, Managing Director of the Finance Agency, stated that the long-term economic advantages of inflation-indexed German government securities as an additional financing instrument are counterbalanced by associated risks. These risks encompass planning security and high financing costs for the federal government in individual years.
Diemer further noted that approximately 3.5 percent of outstanding German government securities are currently linked to inflation, and the linker's share of annual new issue business has been between 1 and 1.6 percent in recent years. The Finance Agency expects minimal market reaction to the discontinuation of linker activities.
Investors may need to reconsider their strategies regarding finances in light of the federal government's decision to halt the issuance of inflation-linked bonds, as they will no longer be able to invest in new federal securities linked to inflation. The existing inflation-linked bonds, or linkers, however, remain tradable on the market, providing investors with an opportunity to manage their finances around inflation risks.
Although the cessation of new issuance of German inflation-linked bonds may limit availability, existing bonds continue to offer a reliable way to manage inflation risks. Investors may consider alternative strategies, such as investing in other types of bonds or assets with some inflation protection. It is essential to be aware of interest rate risk and adjust portfolios accordingly, diversifying into other fixed-income assets with shorter durations or those less sensitive to interest rate changes.
For long-term investors, equities have historically been one of the most reliable inflation-proof investments, as stocks generally perform well during periods of inflation, although they come with their own set of risks, including market volatility.
Sources: [1] Christensen, Mouabbi, and Paulson. [2] [3]
