What is a Bund
A bund is a debt security issued by Germany's federal government, and it is the German equivalent of a U.S. Treasury bond. The German government uses bunds to finance its spending, and bonds with long-term durations are the most widely issued securities. Bunds are auctioned only with original maturities of 10 and 30 years.
BREAKING DOWN Bund
Bunds represent long-term obligations of the German federal government that are auctioned off in the primary market and traded in the secondary market. Bunds can be stripped, meaning their coupon payments can be separated from their principal repayments and traded individually. Bunds pay interest and principal typically once a year, and they represent an important source of financing for the German government.
The principal characteristics of bunds are that they are nominal bonds with fixed maturities and fixed interest rates. All German government debt instruments, including bunds, are issued by making a claim in the government debt register rather than producing paper certificates. A typical bund issue will state its issuance volume, maturity date, coupon rate, payable terms and interest calculation standard used. The smallest denomination of a bund is €0.01, and its redemption by the German government can be made at par value.
Significance of Bunds
Bunds are highly liquid debt securities that are eligible to be used as insurance reserves for trusts, and they are accepted by the European Central Bank as collateral for credit operations. Bunds are auctioned in the primary market at volumes in excess of €1 billion. The German government typically follows up new issues with higher volumes by producing several increases, up to about €15 billion, which helps to maintain a high level of trading volume for bunds.
Bunds account for the majority of the German government debt, typically around 50% of all debt outstanding, underscoring their importance in government funding. By issuing long-term securities such as bunds, German authorities obtain a more stable source of financing with limited need for rolling over debt frequently.
Stripping of Bunds
Beginning in 1997, additional investment options have become available for investors with the introduction of stripping bunds. Stripping results in principle and interest coupons to be separated and traded on a standalone basis with the minimum amount of €50,000 and minimum denomination of €0.01. Stripping can be done by a credit institution or German Finance Agency, whoever carries the custody of the bund account. Coupon strips are typically combined based on their maturity profiles and traded under single security identification numbers. Strips originating from different types of bunds cannot be bundled together.