German cabinet okays $70b in debt to combat recession

Bloomberg

Chancellor Angela Merkel’s cabinet signed off on plans to raise another 62.5 billion euros ($70 billion) in debt to finance the country’s largest stimulus program in recent history.
The proposal has yet to be approved by parliament and would increase net borrowing to 218 billion euros this year. In March the Bundestag, or lower house, had already authorised a debt increase of 156 billion euros.
After years of fiscal discipline that brought Germany scorn and admiration alike, debt had fallen from over 80% of gross domestic product in the wake of the 2008 financial crisis to around 60%. Now it is again projected to rise to 77% of GDP.
Separately Merkel will meet with the premiers of Germany’s 16 states to discuss remaining social distancing rules as well as testing strategies in preparation for a possible second wave of the coronavirus.

Germany hits bond
market yet again
Germany is selling its second round of debt within days to a market still hungry for haven assets.
After drawing over 31 billion euros ($35 billion) of orders for 30-year bonds sold via banks last week, Germany will offer five billion euros of its benchmark bunds. That’s the largest auction since January, as the country increases the pace of its borrowing to fund a massive stimulus program.
Fund managers are uncertain whether bunds will rally or slide given the risks of a second wave of the virus and the prospects for an economic recovery. Yet unprecedented levels of asset buying from the European Central Bank are maintaining a perceived shortage of the securities in the market.
“German net supply for the year should remain negative, in spite of the substantial fiscal package,” said Henry Occleston, a strategist at Mizuho International Plc. “The market coming around to this fact, alongside the current risk-off sentiment, should mean the auction is well received.”
Bund yields have been holding their ground at around -0.40%, just above the ECB’s deposit rate, after sliding to record lows during the coronavirus-driven market turmoil in March. That puts them at around their average level in the past year.
Despite the negative yields, traders can still make money if the bonds rally during bouts of risk-off sentiment. Buyers holding the debt to maturity are effectively paying the government to borrow.
The bidding deadline for the sale of bonds, with a 0% coupon expiring in August 2030, is 10:30 am in London. The prior sale in May received bids more than twice the amount offered.