Commerzbank On Potential Feedthrough Of German Fiscal Situation

Commerzbank write “as markets continue to assess the looming fiscal tightening, more technical side effects e.g. the DFA's own holdings, are also moving into focus.”

• “Recall that in Apr ‘20, the DFA conducted ad-hoc taps of existing bonds worth €142bn for the benefit of coronavirus support programmes.”
• “These were then sold-off or lent out in repo in order to raise cash.”
• “If the budgetary/legal authorisations underlying these instruments were to be withdrawn, so would the case for the DFA to keep these bonds.”
• “Hence, there is a risk that they would be cancelled, or future net issuance be reduced in such a scenario in order to align the DFA's balance sheet with the new budgetary requirements - which could then in turn impact scarcity perceptions and hence swap spreads.”