1 Financial market environment

The idea that interest rates would be cut early and quickly still prevailed in international financial markets at the beginning of the year. Market participants gradually abandoned this idea on account of improved economic data and stalling disinflation in the United States in particular. At the beginning of the year, market participants initially expected that interest rate cuts would already begin in the spring. Due to sluggish disinflation and positive economic signals, central banks, including the US Federal Reserve and the Eurosystem, stressed the data dependence of their approach. For the United States in particular, these factors have shifted interest rate cut expectations for the current year into the future. Market players consider an initial US policy rate cut likely only after the summer. These impulses from the United States have also spilled over into the euro area, for which market players likewise lowered their expectations of rapid interest rate cuts. Market participants continued to consider an initial key interest rate cut in June likely. However, they assessed the future trajectory of policy rates as more uncertain. In this environment, long-run nominal and real interest rates rose in both currency areas, with the relative interest rate advantage of the United States increasing.

Risky assets benefited from a positive boost to the economy and investors’ rising risk appetite. In the European corporate bond markets, for example, yield spreads over safe German federal bonds (Bunds) narrowed markedly. In addition, the international equity markets were boosted by enterprises’ stable earnings performance. In the reporting period, foreign exchange markets were also shaped by strengthening expectations that a US interest rate reversal would now take place at a later date. The persistent weakness in the yen is therefore likely to be because monetary policy in Japan remains much more accommodative than in the United States and the euro area.

2 Exchange rates

Rates of change of the euro exchange rate since the beginning of the year

The euro has depreciated in net terms against the US dollar since the beginning of the year, as the original expectations of interest rate cuts in the United States have shifted further and further into the future. The most important reason for this correction of expectations was the combination of unexpectedly strong rises in US inflation, surprisingly strong overall US labour market data and a string of unexpectedly favourable US economic data. The Federal Reserve’s March interest rate forecast, which continued to hold out the promise of a cumulative 75-basis-point cut by the end of the year, did have a temporary impact on market sentiment. However, market expectations of interest rate cuts shifted noticeably into the future following the announcement of new US inflation figures, which in March surprised on the upside for the second consecutive month. By contrast, inflationary pressures in the euro area continued to recede and economic data were relatively weak. Collectively, this caused interest rate cut expectations in the United States for the current year to weaken more significantly than in the euro area. Recently, however, a countermovement set in following disappointing US economic data in April. On balance, the euro nevertheless depreciated against the US dollar. As this report went to press, the euro stood at US$1.09 and was thus 1.7% weaker than at the beginning of the year.

Following slight losses in January 2024, the euro has been moving sideways against the pound sterling given a virtually unchanged relative interest rate outlook. After a surprisingly substantial rise in UK inflation at the beginning of the year dampened speculation about an imminent interest rate cut by the Bank of England and the pound sterling strengthened broadly, the euro’s exchange rate against the pound sterling fluctuated nearly continuously in a very narrow corridor between £0.85 and £0.86. In both currency areas, inflation rates declined and did not provide any indicative stimulus for relative interest rate expectations and thus for exchange rate developments. As this report went to press, the euro stood at £0.86, and had thus depreciated by 1.6% since the beginning of the year.

The euro appreciated further against the yen owing to the euro area’s continued interest rate advantage, even though the Bank of Japan raised its policy rates slightly. To be sure, in mid-March the Japanese central bank ended its negative interest rate policy, in place since 2016. However, the increase in the policy rate to a range of 0% to 0.1% was comparatively small. In addition, the Bank of Japan stressed that it expected to maintain accommodative financial conditions for the time being. Thus, the euro area’s continued high interest rate advantage over Japan continued to put upward pressure on the euro.[1] Another factor was the Bank of Japan’s decision to leave its monetary policy stance unchanged at its monetary policy meeting in April. During this period, the Japanese Ministry of Finance indicated that it was concerned about the weak yen and did not rule out measures to counter disorderly exchange rate movements. Indeed, the euro temporarily depreciated markedly in early May. In this context, there was talk in the foreign exchange markets about interventions to strengthen the yen. However, this has not yet been officially confirmed. The yen surrendered its previous gains in the space of just a few days, though. As this report was published, the euro thus stood at ¥169, only 0.3% below its previous peak of July 2008. Since the beginning of the year, the euro has appreciated by 8.3% net against the yen.

Even though it moved significantly against individual currencies, the euro’s exchange rate gained only slightly on balance on a weighted average against the currencies of 18 trading partners (+0.5%). In addition to losses against the US dollar and the pound sterling, the euro also depreciated markedly against the Polish zloty (-2.0%) during the reporting period. This was counterbalanced, however, by the aforementioned appreciation against the yen and exceptionally high gains against the Swiss franc (+6.7%) and the Swedish krona (+4.7%). The Swiss franc depreciated across the board following a surprise policy rate cut in mid-March by the Swiss National Bank. Expectations of a relatively rapid interest rate reversal by Sweden’s central bank exerted depreciation pressure on the krona.

Current weakness of the yen contributing to considerable improvement in Japan’s price competitiveness

The yen is currently in a period of marked weakness, both bilaterally against the euro and in effective terms (see Chart 3.2). The euro was trading at a 15-year high of ¥169.3 on 20 May 2024. This equates to an appreciation of 26.6% since the introduction of the euro at the beginning of 1999, a gain of 46.1% since the beginning of May 2020 (when the latest period of trend appreciation began)[1] and close to the all-time high of ¥169.8 in 2008. The yen’s current weakness is largely due to the fact that key interest rates in Japan are exceptionally low by international standards. It is therefore not specific to the euro, but is, in fact, broad-based: the yen’s effective valuation vis-à-vis 60 countries is currently at its lowest level since the inception of monetary union.

Bilateral yen-euro exchange rate and effective nominal exchange rate of the yen

Taken in isolation, the marked real effective depreciation has considerably improved the price competitiveness of the Japanese economy since the 1990s (see Chart 3.3). The nominal effective depreciation of the yen is reflected in a real effective depreciation, even if an unchanged price relationship with other countries is assumed. However, on top of that, Japanese inflation has been lower than in Japan’s main trading partners almost continuously since the 1990s. As a result, the price relationship has gradually shifted in favour of Japanese competitiveness. All these factors together have led to a massive real effective Japanese devaluation over the past 25 years. Taken in isolation, this means that Japan’s price competitiveness has improved considerably, by around 50% since the introduction of the euro at the beginning of 1999.

Real effective exchange rate as an indicator of Japan's price competitiveness

An approach developed at the Bundesbank[2] estimates Japan’s current price competitiveness to be very favourable (see Chart 3.4). A theoretically derived benchmark is required to assess Japan’s current price competitiveness. In the present case, this benchmark should factor in the fact that Japan had an exceptionally high relative price level over many decades. The productivity approach applied by the Bundesbank is suitable for analysing Japan’s price competitiveness because it takes into account relative price levels rather than the indices with no price-level elements that are customary elsewhere and, in addition, the relative productivity levels of the respective countries when assessing competitiveness. In fact, Japan’s price competitiveness is currently 24% more favourable than the benchmark figure calculated using the productivity approach. Given the above-mentioned real effective depreciation of Japan’s currency by approximately 50% in the past quarter-century, an even more favourable figure might have been expected. However, the aforementioned long period of an exceptionally high relative price level was accompanied by fairly weak price competitiveness in Japan until 2021. Japan’s price competitiveness is also impaired by the fact that labour productivity per hour in Japan is, to this day, relatively low compared with its western trading partners.

Indicator of Japan's price competitiveness based on productivity approach*

The nominal effective depreciation of the yen has made Japanese imports more expensive, thus raising the question of an economic policy response. The nominal depreciation of the yen has not only improved the price competitiveness of Japanese firms but also made Japanese imports more expensive, leading to a rising cost of living in the country, e.g. for imported staple foods or energy.[3] This could be mitigated by a reversal of currency developments towards a nominal effective appreciation of the yen. In the past, Japanese authorities have, when faced with similar situations, repeatedly used foreign exchange market interventions to influence the yen, for example in October 2022. In the spring of 2024, market participants also reported conspicuous, short-term surges in demand for yen, giving rise to speculation that the Bank of Japan was active in the foreign exchange market. Purchases to support the yen send out a restrictive monetary policy stimulus. However, this contrasts with the still exceptionally accommodative – especially by international standards – interest rate policy being pursued by the Japanese monetary policy authorities.

At present, the divergence in the monetary policy stance means that there is a major interest rate differential (across the entire maturity spectrum) between Japan and other major currency areas, particularly the United States. In the three-month bucket, for example, this differential currently amounts to more than 5 percentage points compared with the United States. In the past, investors used such interest rate differentials for carry trades. This involved borrowing funds in a low-interest rate currency and investing them in a high-interest rate currency. If the low-interest rate currency depreciated during the investment period, as the yen has done since 2020, investors reaped a currency gain in addition to earning a higher interest rate. This rendered currency carry trades particularly lucrative.[4] This suggests that the downward pressure on the yen is currently structural in nature.

The yen’s weakness from mid-May 2020 onwards was initially driven by the return of an appetite for risk in the markets following the first coronavirus shock. The fact that the euro area experienced a stronger increase in inflation than Japan the following year further favoured the euro against the yen in that this caused market expectations of interest rate hikes in the single currency area to rise, resulting in a gradual widening of the euro area’s interest rate advantage over Japan.
See Deutsche Bundesbank (2023a) and Fischer (2019).
In the two goods categories energy and food, the share of imports in Japan stood at around 90% and 58% respectively in 2022.
See Deutsche Bundesbank (2022a).

3 Securities markets

3.1 Bond market

Amidst diminishing expectations of interest rate cuts, government bond yields in the euro area and the United States have risen significantly since the beginning of the year. At the turn of the year, market actors were expecting central banks to launch a series of rapid interest rate cuts for 2024. Given unexpectedly and persistently favourable economic data and renewed price pressures in the United States, expectations of interest rate cut expectations were gradually deferred. Market participants regarded it as being increasingly likely that the Fed could keep its policy rates at current levels beyond the middle of the year. Although at the beginning of the year futures markets were still signalling policy rate cuts of up to 140 basis points for the United States up to the end of 2024, the size of these cuts had shrunk to 46 basis points at the end of the reporting period. Overall, nominal yields on ten-year US Treasuries increased by 57 basis points to 4.5% at last report. The corresponding real yields on inflation-indexed US Treasuries rose by 40 basis points to 2.1%.

Expected policy rate cuts until the end of 2024

The subdued economic activity compared with the United States and the somewhat more favourable inflation picture in the euro area prompted market actors to lower their expectations of interest rate cuts for the euro area somewhat less sharply than in the United States. One factor which might have contributed to this is that several members of the ECB Governing Council have publicly voiced the possibility of an initial key interest rate cut in the summer barring a deterioration in the inflation outlook. Stronger interest rate-cutting expectations also contrasted with the more restrictive monetary policy impulses from the United States induced by the macroeconomic environment, which, according to a model-based analysis, have been transmitted to the euro area. At the end of the reporting period, €STR forward rates indicated cumulated policy rate cuts of 68 basis points by the end of the year. In early January, forward rates had still been signalling policy rate cuts of up to 160 basis points for 2024. Overall, the GDP-weighted yield on ten-year euro area bonds increased by 40 basis points to 3.0%, while the real interest rate measured in terms of swap contracts increased by 22 basis points to 0.4%.[2] The US yield advantage expanded in nominal and real terms.

Ten-year real interest rates

The Bund yield curve shifted upwards in the reporting period and flattened somewhat. This means that it was somewhat less strongly inverted than at the beginning of the year. If this pattern is interpreted as an empirical signal of how likely investors believe it is that a recession will occur, their concerns are likely to have diminished in light of the recent, somewhat more positive economic data, amongst other factors.

Historical decomposition of changes in yields on ten-year German federal bonds (Bunds)

Euro area sovereign spreads narrowed despite the general rise in euro area interest rates. One reason for this could be the increasing free float of Bunds in the hands of private investors since mid-2022. The associated higher availability of Bunds helped to reduce scarcity observed in the past and the resulting markdowns on Bunds.[3] As a result, Bund yields converged upwards towards yields on other euro area sovereigns. In addition, in financial markets, market participants’ risk appetite continued to rise from a high level, meaning that investors were willing to take risk into their portfolios in return for lower compensation payments. Overall, the yield spreads of ten-year sovereign bonds issued in the euro area over ten-year Bunds narrowed by 15 basis points (GDP-weighted average). Since the start of the year, the spread of ten-year Italian government bonds (39 basis points) has fallen very significantly. Given their high yield levels, these could have particularly benefited from the demand of investors with a high risk appetite who were seeking to secure high long-term interest rates ahead of the expected key interest rate cuts in the euro area.

Free float of government bonds in Germany and the rest of the euro area

Their high credit quality and liquidity make federal securities (Bunds) an important benchmark for pricing other financial instruments in the euro area. A prerequisite for fulfilling this benchmark function is a sufficiently large free float. Comparing the free float of government bonds in Germany with that of government bonds in the rest of the euro area allows developments in the market for Bunds to be interpreted.[1]

Generally speaking, free float refers to the share of a securities issue that is freely available for trading, as opposed to the share that is held until maturity. Sufficiently good tradability is a prerequisite for bond prices to reflect new, relevant information quickly. The Eurosystem’s Securities Holdings Statistics by Sector (SHSS)[2] can be used to calculate the free float from the sum of holdings in the private sector as a whole, less the holdings of insurance corporations and pension funds.[3] The latter are classed as strategic investors because they match their long-term liabilities with assets held until maturity and are also subject to strict regulatory requirements that permit the acquisition of assets only within a narrowly defined mandate. Public investors, such as central banks, are likewise classed as long-term investors, which tend to hold securities until maturity. The holdings of this group of investors are therefore not considered free float, either.

Share of government bonds in free float

Euro area government bonds in free float decreased overall in recent years, held steady at a low in the first half of 2022 and have since been increasing again.[4] The relative free float of Bunds fell significantly on the whole between 2014 and 2021, declining by just under 25 percentage points to 26%, and rose significantly again for the first time from mid-2022. At last count, it reached 32%. Relative free float in the rest of the euro area followed a similar pattern, but the decline starting in 2014 was considerably smaller, at just under 18 percentage points. Free float in the rest of the euro area also rose less significantly in 2023. At just over 39% currently, this level is higher than that of Bunds.

The free float of euro area government bonds declined mainly due to the Eurosystem’s public sector purchase programme (PSPP) and pandemic emergency purchase programme (PEPP). The purchases led to the Eurosystem becoming the largest single investor in euro area government bonds. Prior to the discontinuation of net monetary policy purchases in mid-2022, 36% of the total outstanding volume of Bunds was held by the Bundesbank.[5] Since then, the free float of government bonds in the euro area has been picking up again.[6]

Federal securities: outstanding volume and Bundesbank holdings

In recent years, the free float of Bunds has fluctuated more strongly than the free float of government bonds issued by other euro area countries. This is due to the interplay between demand induced by monetary policy and debt determined by fiscal policy: the additional demand from the Eurosystem’s monetary policy purchase programmes was based not on outstanding volumes but rather largely on the central banks’ capital key and was thus very much in line with GDP. This meant that demand in all government bond markets was similarly strong as measured against economic output. By contrast, the outstanding volume of government bonds depends on a given country’s issuance behaviour and thus on its national fiscal policy.[7] The outstanding volume of Bunds was comparatively low when the PSPP and later the PEPP were launched, given the relatively low level of debt in Germany. Monetary policy purchases therefore reduced the free float of Bunds relatively quickly. The additional, significant new issuance of Bunds at the start of the coronavirus pandemic did little to change this pattern, as Germany’s new debt was lower than that of the rest of the euro area during this period, too.

Changes in the holder structure of government bonds in free float since the end of net purchases

Forming the flip side to Eurosystem purchases are the sales made by price-sensitive investors, i.e. investors who do not hold securities until maturity. The following compares the changes in holdings in the sectors accounting for the free float since the end of net purchases under the monetary policy purchase programmes. Investor groups in the euro area are broken down as follows: “banks and other financial intermediaries” (hereinafter referred to as “banks”), “investment funds” and the “non-financial sector”, which encompasses non-financial corporations and households. For non-euro area investors, the data recorded are not as granular, meaning that the free float is only accounted for by the large overall group of private investors, which are primarily investors in the financial sector.

Change in free float shares in the government bond market, by sector*

Until mid-2022, banks and investment funds were the largest seller group in the euro area. It is striking that banks had not replenished their holdings by the end of 2023, despite the changed interest rate environment. This suggests that new regulatory requirements or changing business models have led to a longer-term change in banks’ investment behaviour.[8] By contrast, investment funds, which were unaffected by the changed framework conditions, returned to the bond markets. The non-financial sector (households, in particular) also increased its share.

Since the end of net purchases, the group of private investors resident outside the euro area, which includes the large non-euro area financial investors, has clearly differentiated between Bunds and government bonds from the rest of the euro area. After significantly reducing their holdings up until mid-2022, they have now increasingly returned. They appear to see Bunds as the benchmark investment for the euro area as a whole.

Decrease in the scarcity premium

Free float and scarcity premium for federal securities

The free float of federal securities is moving in tandem with the scarcity premium.[9] The scarcity premium is the spread between ten-year Bund yields and the ten-year overnight index swap (OIS) rate.[10] Since mid-2022, this spread has narrowed gradually (amid slight fluctuations) as the free float of Bunds has increased. Consistent with relaxed repo markets, this indicates that Bunds are less scarce.

See also Deutsche Bundesbank (2023c, 2022b, 2018) for previous analyses of the holder structure and free float of Bunds. See the ECB blog of Ferrara et al. (2024) for information on the holder structure in the euro area.
The SHSS capture the proprietary and customer securities holdings of all reporting account-keeping institutions in the euro area. The SHSS do not include the holdings of the ECB or the euro area national central banks; see Deutsche Bundesbank (2015).
The outstanding volume of government bonds that is not recorded in the SHSS data is allocated in equal parts to free float and strategic investors. In order to avoid possible double counting in the SHSS data, the SHSS holdings for each bond are compared with the amount outstanding. If the holdings obtained from the SHSS are larger, non-euro area private investor sector holdings are adjusted downwards (see Eser et al., 2019).
As an alternative to measuring free float (in relative terms) as a percentage of the total outstanding volume of bonds, free float can also be measured in absolute amounts; see Deutsche Bundesbank (2023c).
These are holdings of Bunds from the Bundesbank’s monetary policy purchases. Holdings of the rest of the Eurosystem are not included here.
Net purchases under the PEPP were discontinued at the end of the first quarter of 2022, while net purchases under the PSPP were discontinued at the end of the second quarter of 2022. Since March 2023, the Eurosystem has reduced its holdings under the extended asset purchase programme (APP), which includes the PSPP, by an average of €15 billion per month.
See Deutsche Bundesbank (2024a) for information on the creditor structure in the largest euro area countries.
For instance, more stringent regulatory requirements may have caused banks to more strongly reduce their market-making activities; see Haselmann et al. (2022).
This comparison is based on the assumption that the Eurosystem has purchased government bonds broadly proportionally across all maturity bands and that scarcities in the ten-year segment are also reflected in the free float for all federal securities.
See Deutsche Bundesbank (2023b).

In line with developments in the United States and the euro area, yields also rose in other currency areas, such as the United Kingdom and Japan. At its March meeting, the Bank of England stressed that, owing to surprisingly high inflation rates, some indicators of the persistence of inflation in the United Kingdom remained elevated. Market participants then adjusted their policy rate outlook significantly upwards here, too. Yields on ten-year gilts increased by 64 basis points to 4.2%. Yields on ten-year Japanese government bonds – which react very cautiously to international interest rate developments – also rose quite significantly, by 36 basis points to 1.0%. At its March meeting, the Bank of Japan decided to raise its policy rate moderately by 10 basis points, ending its negative interest rate policy that had been ongoing since 2016. It also decided to maintain its envelope of government bond purchases. In this context, however, it no longer mentioned a specific cap on ten-year Japanese government bond yields.

Market-based inflation indicators have risen somewhat for the current year, but continue to imply that the 2% definition of price stability will be reached next year. Since the end of December, inflation compensation, calculated on the basis of euro area inflation swaps, has risen to 2.3% (+0.2 percentage point) for the current year. It is noteworthy that market-based inflation compensation has, on balance, hardly been affected by the volatile energy component. The energy component also includes oil and gas prices, which, taken together, remained virtually unchanged on balance during the reporting period.[4] The inflation dynamics of the euro area core rate, for which no separate swaps are traded in the financial market, were thus probably somewhat more persistent than expected from the perspective of market participants. More recently, the improved sentiment indicators for economic developments this year also contributed to market participants expecting a marginally slower decline in inflation in 2024. For the period beyond 2024, the subdued growth outlook was also a factor alongside the contribution of restrictive monetary policy in dampening price pressures in the euro area – unlike the United States, where the economy looks set to develop more dynamically in the future as well. Market-based inflation compensation for 2025 amounted to 2.1%, within the Eurosystem’s definition of price stability.

Expectations for HICP inflation in the euro area

Over the medium to longer term, market participants perceive a somewhat higher risk of inflation exceeding target. This is indicated by the preference-weighted probabilities for future inflation rates derived from inflation options, which include risk considerations in addition to the probabilities of occurrence. Market participants have again recently been agreeing average inflation compensation of over 2% for traded inflation swaps over the next five years, which is more than at the end of December. Longer-term market-based inflation compensation has also picked up slightly since the end of December. The five-year forward inflation rate five years ahead, which can also be derived from inflation swaps, stood at 2.3% at last count, up 0.1 percentage point from the end of December. By contrast, longer-term survey-based inflation expectations calculated on a quarterly basis by Consensus Economics for the euro area six to ten years ahead remained virtually unchanged. They were still close to the inflation target of 2% in April, too. Consequently, the difference between market-based and survey-based long-term inflation expectations widened slightly. This difference can be interpreted as a measure of the inflation risk premium. Investors are therefore still willing to pay a premium to hedge against unexpectedly high inflation scenarios. Market and survey-based indicators for the longer-term US inflation outlook developed in a similar vein in the reporting period. In the United States, market-based five-year US forward inflation rates five years ahead rose to 2.6% (+0.1 percentage point).

Five-year forward inflation rates in five years

The rising interest rate level and an increasing appetite for risk shaped developments in the corporate bond markets. Yields on BBB-rated European corporate bonds and high-yield bonds with residual maturities of between seven and ten years were also slightly higher of late. However, they rose less strongly than the yields on Bunds having the same maturity. Spreads thus narrowed significantly on balance. This was mainly due to the aforementioned rising risk appetite in the financial markets and the falling scarcity premium for Bunds. The spreads of financial corporations fell particularly sharply. One reason for this could be that their exchange-traded value increased significantly in the reporting period. Yields on bonds issued by financial corporations react more strongly to price fluctuations on stock exchanges owing to the issuers’ comparatively low levels of equity capital. Measured by yield spreads, financing costs for European enterprises in all rating categories were recently close to or below their respective five-year averages. Financing conditions in the capital market have also had an impact on enterprises’ issuing activity in recent years.[5]

Securities issuance in the German capital market in 2023

The Bundesbank publishes monthly securities issues statistics that cover data on debt securities and shares as well as open-end and closed-end investment fund shares. The Bundesbank also collects balance of payments statistics on the cross-border purchases of securities by residents and non-residents.[1] The latest figures on the sale and purchase of securities in Germany are then published in a monthly press release immediately after they have been collected.[2] In the following, securities issuance in 2023 will be discussed against the background of important capital market trends observed in recent years.[3]

At €1,686.3 billion, gross issuance in the German bond market in 2023 was at a similar level as in the previous year and thus continued to be markedly higher than the average of the last five years. Only in the crisis year of 2020 – defined by the coronavirus pandemic – was the gross number of debt securities issued even higher. Issuing activity remained largely stable even in net terms, i.e. after taking account of redemptions and changes in issuers’ holdings of their own bonds. The outstanding volume of domestic bonds thus rose by €158.2 billion in 2023 and therefore saw a similar increase as in the previous year.

All in all, the ebbing consequences of the pandemic, the Eurosystem’s tightening of its monetary policy stance and the deteriorating economic outlook over the course of the year were the main factors to have an impact on the net issuance of debt securities. To a lesser extent, the ongoing high level of inflation, which on its own boosts the nominal issuance of debt securities, also had an effect. This is because higher inflation means that borrowers have to borrow larger nominal amounts even if their borrowing requirements have remained unchanged in real terms. Among domestic issuers, it was mainly credit institutions and the public sector that issued new debt securities on balance (€88 billion and €82 billion, respectively). The outstanding volume of debt securities issued by non-residents in the German capital market rose significantly as well (€131.1 billion). By contrast, domestic non-financial corporations made almost no changes to their debt financing via the capital market.

Net issuance of German debt securities

Net issuance of domestic debt securities therefore continued to be much lower than at the start of the coronavirus pandemic. At the time, the public sector, in particular, had raised large amounts of funds in the capital markets in order to finance additional government expenditure in response to the crisis. Non-financial corporations likewise took advantage of the then low interest rate level in the capital market so as to borrow on a large scale to expand their holdings of liquid assets and to be able to cover any potential future financing needs early on.[4] By contrast, the pandemic had no material impact on banks’ issuance behaviour at the time. This is because targeted longer-term refinancing operations (TLTROs) presented credit institutions with an attractive alternative refinancing option within the Eurosystem. These expansionary monetary policy measures helped to mitigate the tightening of lending policies by banks in response to the pandemic.

Although the pandemic had come to an end, net issuance of domestic debt securities last year was still well above its pre-pandemic level. This is attributable, first, to credit institutions’ lively issuing activity by historical standards. Banks are likely to have been reacting to the fact that the Eurosystem was supplying them with less liquidity after TLTROs were phased out. Second, the public sector borrowed significantly less than at the start of the pandemic. Compared with the preceding year, however, they expanded their capital market debt markedly and thus also contributed notably to the relatively high net issuance of domestic debt securities.

Unlike banks and the public sector, non-financial corporations issued fewer debt securities in 2023 than in the previous year. In net terms, they did not raise any new funds. First, this may reflect enterprises’ relatively positive profitability and financing, which have already helped them to absorb the steep rises in energy prices since 2021.[5] Second, it is likely that monetary policy tightening, the gloomier economic outlook and high uncertainty also had a part to play. This is because they made firms more reluctant to invest and thereby diminished their financing needs as well, even though their investing activities had proved to be relatively robust up to that point on account of considerable order backlogs. Taken in isolation, the rise in corporate bond yields also had a dampening effect. The temporary widening of yield spreads on corporate bonds in the second quarter of 2023, which reflected fears of contagion effects from the banking turmoil in the United States, is also likely to have muted firms’ issuing activity, at least until the uncertainty passed.

The buyers’ side was clearly affected by the tighter monetary policy stance. This is especially evident with regard to the discontinuation of reinvestments under the asset purchase programme (APP). The net purchases of German government bonds by the ECB and the Bundesbank under the monetary policy asset purchase programmes had previously led to a marked drop in the volume of German debt securities held by residents and non-residents. Then, in 2023, German debt securities started attracting considerable interest again, especially abroad,[6] with non-resident investors acquiring over half of the net debt securities issued in Germany that year.[7] Domestic non-banks were also a major group of buyers. By contrast, the Bundesbank’s bond holdings decreased perceptibly in keeping with the intention of tightening monetary policy (-€59.8 billion).

3.1 Investment activity in the German securities markets

€ billion

Item

2021

2022

2023

Debt securities

Residents

Credit institutions

Deutsche Bundesbank

Other sectors

Non-residents

Shares

Residents

Credit institutions

Non-banks

Non-residents

Mutual fund shares

Investment in specialised funds

Investment in retail funds

of which: Equity funds

243.5

-41.9

245.2

40.2

-12.6

102.9

10.9

92.1

13.0

116.8

41.0

13.7

143.5

2.9

49.8

90.8

7.4

3.0

-8.3

11.3

-9.3

73.0

6.1

5.4

126.2

32.2

-59.8

153.9

163.1

52.9

14.7

38.3

-10.9

38.5

6.0

8.1

The equity issuance statistics provide information on sales of domestic issuers’ shares, market capitalisation according to issuer group and changes in the capital of domestic public limited companies. The outstanding volume of shares in Germany is lower than that of debt securities. Larger initial public offerings or larger issuances by individual enterprises may make up a marked portion of the total sales of shares. Issuances in 2021 were particularly high (€116 billion), with technology shares contributing substantially to this. Some firms in the technology sector generated large profits that year owing to the pandemic, recording rising equity prices. This, together with low interest rates, continued digitalisation and catch-up effects from the previous year, translated into multiple initial public offerings. By contrast, a markedly lower volume of equities was issued last year (€42 billion) in light of higher interest rates and increased scepticism about the economy. German shares were acquired exclusively by domestic investors on balance, while non-resident investors removed German shares from their portfolios in net terms. This reflects reallocations in favour of bonds, which became more attractive due to the rise in interest rates.

The Bundesbank also collects data on the issuance of domestic and foreign mutual fund shares in its investment funds statistics. Sales of mutual fund shares, which, like share sales, had been exceptionally high in 2021, continued to decline last year. Investors may have been responding to the interest rate level, which has been rising since then and has made alternative investment opportunities more attractive. Among the categories of investment funds, bond-exclusive funds, in particular, were able to increase their sales of fund shares. Much the same as shares, German mutual fund shares were purchased exclusively by domestic investors on balance, while non-euro area residents disposed of them in net terms.

In order to fulfil its task, the Bundesbank is entitled to order and collect banking and monetary statistics from all credit institutions, investment management companies and externally managed investment companies. The Bundesbank may publish these statistics for general purposes. Up-to-date information and statistical series are available online: https://www.bundesbank.de/en/statistics/time-series-databases in particular https://www.bundesbank.de/en/statistics/money-and-capital-markets/securities-issues/
See Deutsche Bundesbank (2024b).
Data from the individual securities issues statistics and balance of payments statistics are used for this.
See Deutsche Bundesbank (2022c).
See Deutsche Bundesbank (2023d).
See Deutsche Bundesbank (2024c).
See supplementary information entitled “Free float of government bonds in Germany and the rest of the euro area”.

3.2 Equity market

International equity markets benefited from positive economic impulses, stable profitability and an increasing risk appetite among investors. At the beginning of the year, some equity market indices, such as the S&P 500 and the CDAX, climbed to new highs. Factors contributing to this included the by and large positive economic signals and brightening sentiment indicators, which are also likely to have led to an increase in investors’ risk appetite. Geopolitical tensions, particularly in the Middle East, had only a temporary impact on equity markets and did not cloud sentiment on a lasting basis. In addition, the equity markets were boosted by enterprises’ stable earnings performance. In April, the major equity indices declined somewhat, but were able to reach highs again at the end of the reporting period. The observed rise in long-term interest rates and the further decline in expectations of a cut in interest rates for the current year are likely to have had a dampening effect on equity price developments.

Overall, the major global indices have moved upwards in unison. For example, the S&P 500 has risen by 11.3%, the EURO STOXX by 10.8% and, at a slightly slower pace, the CDAX by 7.9% and the FTSE 100 by 8.9%. Unlike in the last quarter, which was characterised by a rally in just a few technology stocks, the aforementioned factors have had a general impact on prices since the beginning of the year. This can also be seen in the broad-based rise in prices and the appreciation of many smaller stocks. The Japanese Nikkei index, in particular, also increased significantly, with an increase of 16.8%. Here, analysts cite in particular the weak yen exchange rate, which is likely to have a positive impact on exports by Japanese firms. In addition, the Nikkei is reported on a yen basis. For US dollar-based investors, the increase would therefore be correspondingly smaller.

European and US bank stocks have performed significantly better than the general equity indices since the beginning of the year. On the one hand, very good quarterly results for some large banks are likely to have contributed to the better development compared with the overall indices. On the other hand, banks likely tend to benefit from a scenario of persistently high interest rates. The reduced fear of a recession may also have supported bank shares on both sides of the Atlantic, as this makes credit defaults less likely. On balance, the prices of European and US bank stocks have risen by 25.6% and 14.0%, respectively, since the start of the year.

The valuation levels of European equities have risen again since the end of the year. Valuations for US equities continue to be relatively high. The EURO STOXX has seen its earnings yield and implied cost of equity fall again. The implied cost of equity is derived from a dividend discount model that also takes into account enterprises’ medium-term earnings outlook and the path of risk-free interest rates. The medium-term earnings outlook for both the EURO STOXX and the S&P 500 increased in the reporting period. This is in line with the overall more positive economic outlook and is also likely to have contributed to the price gains since the start of the year. In a long-term comparison, the implied cost of equity and the equity risk premia continue to indicate a relatively high valuation for European and US equities overall.

4 List of references

Deutsche Bundesbank (2024a), Government debt in the euro area: current developments in creditor structure, Monthly Report, April 2024.

Deutsche Bundesbank (2024b), Moderater Nettoabsatz am deutschen Rentenmarkt im März 2024, press release, May 2024.

Deutsche Bundesbank (2024c), German balance of payments in 2023, Monthly Report, March 2024.

Deutsche Bundesbank (2023a), Is price competitiveness favourable in Germany and the euro area?, Monthly Report, October 2023, pp. 13-38.

Deutsche Bundesbank (2023b), Term structures in economic analysis, Monthly Report, January 2023, pp. 53-74.

Deutsche Bundesbank (2023c), Developments in the free float of Federal securities, Monthly Report, May 2023, pp. 39-42.

Deutsche Bundesbank (2023d), Germany as a business location: selected aspects of current dependencies and medium-term challenges, Monthly Report, September 2023, pp. 15-35.

Deutsche Bundesbank (2022a), The validity of interest parity in times of crisis, Monthly Report, October 2022, pp. 47-69.

Deutsche Bundesbank (2022b), Holder structure and free float of Federal securities, Monthly Report, May 2022, pp. 40-43.

Deutsche Bundesbank (2022c), Development of the debt situation in the euro area private non-financial sector since the outbreak of the COVID-19 pandemic, Monthly Report, April 2022, pp. 31-48.

Deutsche Bundesbank (2018), The market for Federal securities: holder structure and the main drivers of yield movements, Monthly Report, July 2018, pp. 15-38.

Deutsche Bundesbank (2015), Securities holdings statistics for analysing holdings of securities in Germany and Europe: methodology and results, Monthly Report, March 2015, pp. 95-107

Eser, F., W. Lemke, K. Nyholm, S. Radde and A. L. Vladu (2019), Tracing the impact of the ECB’s asset purchase programme on the yield curve, ECB Working Paper, July 2019, No 2293.

Ferrara, F. M., T. Hudepohl, P. Karl, T. Linzert, B. Nguyen and L. V. Cruz (2024), Who buys bonds now? How markets deal with a smaller Eurosystem balance sheet, ECB Blog, 22 March 2024.

Fischer, C. (2019), Equilibrium real exchange rate estimates across time and space, Deutsche Bundesbank Discussion Paper, No 14/2019.

Haselmann, R. F. H., T. K. Kick, S. Singla and V. Vig (2022), Capital Regulation, Market-Making, and Liquidity, Goethe University Frankfurt, Center for Advanced Studies on the Foundations of Law and Finance (LawFin), LawFin Working Paper 44.

For the implications of the current yen weakness, especially for Japan’s price competitiveness, see the supplementary information entitled “Current weakness of the yen contributing to massive improvement in Japan’s price competitiveness”.
Real interest rate measured as the difference between €STR swap rate and the rate for concurrent inflation swaps. Real interest rates derived from swaps are less distorted by liquidity premia than returns on inflation-indexed bonds; see Deutsche Bundesbank (2023b).
See supplementary information entitled “Free float of government bonds in Germany and the rest of the euro area”.
While short-term futures prices for oil have risen since the beginning of the year, those for gas have fallen. Taken together in the energy component, these opposing price developments partially offset each other.
See the supplementary information entitled “Securities issuance in the German capital market in 2023”.

Monthly Report – May 2024 Vol. 76 No 5

Monthly Report – May 2024 Vol. 76 No 5