Germany launches 30-year green bond, yields rise ahead of U.S. inflation

Credit: REUTERS/Regis Duvignau

Germany started the sale of a new 30-year bond on Tuesday that will add longer-dated debt to its issuance programme backing environmentally-friendly expenditure, as euro area bond yields rose sharply ahead of Wednesday's U.S. inflation reading.

By Yoruk Bahceli

May 11 (Reuters) - Germany started the sale of a new 30-year bond on Tuesday that will add longer-dated debt to its issuance programme backing environmentally-friendly expenditure, as euro area bond yields rose sharply ahead of Wednesday's U.S. inflation reading.

The 30-year green bond, pricing later on Tuesday according to memos from two lead managers seen by Reuters, is Germany's first such issuance of the year. It will extend the country's green yield curve following the issuance of an inaugural 10-year green bond last September and a five-year in November.

Unlike other European governments that have focused on a single maturity for green issuance, Germany is building a yield curve of green bonds, which investors hope will act as a reference point for other borrowers in the region.

The focus is on how much of a green premium, or 'greenium', investors will have to pay to get hold of longer-dated paper. Lead managers are initially guiding the bond to price at around 1 basis point premium to its twin, a conventional bond with the same maturity DE0001102481, the memos said.

"The big question is the price and how much green premium will be priced from the start," Danske Bank analysts told clients in a preview.

Green bonds usually trade with a lower yield, or a price premium, than comparable conventional bonds, as dedicated funds chase a limited available supply.

All German green bonds are twinned with a conventional peer, allowing investors to switch between the two and mitigating any liquidity concerns.

Germany issued 11.5 billion euros of green bonds last year and expects to issue a similar amount this year.

10-YEAR GREEN BOND

In addition to the 30-year bond, for which a size has not yet been announced, Germany will issue a new 10-year green bond via auction in September and re-open it in October to raise a total of 6 billion euros.

In the secondary market, Germany's 10-year yield, the benchmark for the euro area, was up 4 basis points to -0.17% by 0750 GMT. DE10YT=RR

Italian bond yields rose similarly, but their premium above Germany was at 109 bps, down from 116 bps on Monday IT10YT=RR, DE10IT10YT=RR.

Bonds sold off alongside equities ahead of Wednesday's U.S. inflation reading, which investors will watch to gauge whether it means a change to the Federal Reserve's stance on inflation.

"European bonds are far more expensive than U.S. ones and hence more sensitive to a risk reduction," said Sebastien Galy, senior macro strategist at Nordea Asset Management.

Mizuho analysts said the German supply, which will be followed by a $58 billion auction of three-year U.S. Treasuries, may also weigh on the market.

(Reporting by Yoruk Bahceli Editing by Rachel Armstrong and Gareth Jones)

((Yoruk.Bahceli@thomsonreuters.com; +44 20 7542 7571; Reuters Messaging: yoruk.bahceli@thomsonreuters.com))

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