What Is a Bund?
A bund is a debt security issued by Germany's federal government to finance outgoing expenditures. Bunds are auctioned only with original maturities of 10 and 30 years, with the majority of them falling into the latter group. Bunds are widely viewed as the German equivalent of U.S. Treasury bonds.
- Bunds are debt securities issued by the German government to generate revenue with which to finance expenditures.
- Bunds are auctioned only with original maturities of 10 and 30 years.
- The vast majority of bunds carry a 30-year duration.
- Bunds may be stripped, where their coupon payments are segregated from their principal repayments and traded autonomously.
- Bunds are accepted by the European Central Bank as collateral for credit operations.
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, where their coupon payments are separated from their principal repayments and are traded individually. Bunds typically pay interest and principal once a year and represent an important source of financing for the German government.
Bunds are principally characterized by the fact 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, as opposed to 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. 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 about 50% of the German government's outstanding debt, underscoring their importance in government funding. By issuing bunds and other long-term securities, German authorities obtain a more stable source of financing, thereby reducing the need to frequently roll over debt.
Once a niche product, Bunds became relatively mainstream following the 2009 European Sovereign Debt Crisis.
Stripping of Bunds
Beginning in 1997, additional investment options became available, with the introduction of stripping. This resulted in principle and interest coupons being 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—if they carry the custody of the bund account. Coupon strips are typically combined based on their maturity profiles, and they are traded under single security identification numbers. Strips originating from different types of bunds cannot be bundled.