Dividends and Germany needs billions, but its bonds go unsold

In the world of business, business runs on credit. If there is no credit, business has to shut down operations or preserve cash and opportunities will go by. When that happens competitors who are flush with cash will seriously take advantage of opportunities and the business will have limited choices. The same principle happens in governments. Governments have the advantage of raising taxes to pay for financing, but if the world is headed to recession, to do the same thing rates have to rise.

In Europe, the powerhouse country has been Germany, for many years it could and did use its clout in the European Union, but something is happening. In an article by Samuel Indyk and Harry Robertson of Reuters, Germany is having trouble selling its bonds.

At an auction in late September, Germany offered $4 billion in bonds at auction and only $2.4 billion was taken. This 0.47 bid to offer ratio was the lowest of any 7-year German bond sale and the 2nd lowest of its auctions going back to 1999.

Analysts point to 2 factors: one an expected surge in German bond issuance as governments tackle the energy crisis (the move from Russian oil and gas to something else) and the cental bank’s aggressive rate hikes and their plans to gradually back out of the bond markets.

Euro zone governments and the European Union are expected to issue a record $535 billions of net debt in 2023, according to Bank of America.

France issued $10 billion euros or $11.34 billion in dollars of medium-term notes to strong demand.

In Germany, the increasing rates from Central Banks tend to mean investors do not want to buy long term bonds, even though there is demand for short term bonds. Another factor is December is year end and some buyers may not want to hold too much risk going into year end.

Linking to dividend paying stocks, when you purchase these stocks, you expect them to be profitable and pay dividends or do stock buybacks which increases the value of the stock. These stocks are the ones with access to credit no matter the economy and as long as they have access to credit or have AA ratings there is little you have to do but collect the dividends.

There are more questions than answers, till the next time – to raising questions.

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