Investors still look to Germany but have their eyes on bunds

The big demand for German bonds shows protecting an investment outweighs the yield

ONCE UPON a time, it seemed as if every aircraft from Ireland to Germany held property tourists, poring over glossy portfolios and dreaming of a “real estate empire”. The investors are still on board, but times have changed – as have their investments.

As the euro zone crisis rolls on, and markets withhold judgment on last week’s summit deal, Irish people are quietly voting with their feet.

“I realised the time had come to do something when I heard Michael Noonan owned German sovereign bonds,” said Pat O’Shea*, a 35-year-old computer consultant from Dublin. “Germany is the last safe house in Europe.”

With no stocks, bonds or any other kind of investments, his only motivation was to put his savings beyond the reach of Irish banks. Last June he found what he was looking for and boarded a flight to Frankfurt.

Finding the cornerstone of euro zone finance begins at the foot of the European Central Bank tower and ends, a 20-minute tram ride later, in the wind-swept northern outskirts of Frankfurt.

German sovereign bonds, referred to collectively as bunds, are managed in an unspectacular rented office in a shared office block.

Beyond the revolving door in the atrium, between trees in pots, visitors are welcomed by a bronze statue of a tortoise named Dr Günter Schild, advertising mascot of the Bundesfinanzagentur.

The Federal Finance Agency was established a decade ago as a wholly-owned subsidiary of the federal finance ministry to sell debt on behalf of Berlin, collect the money, and add it to Germany’s €1 trillion-plus debt pile.

Just 1 per cent of debt is in private hands: €10 billion held directly by the agency in 4,350 private “debt register accounts”.

While old bonds, a mass of tangled calligraphy, line the white corridor walls in frames, the entire debt business is these days carried out electronically.

While anyone in Ireland can buy bunds through a broker, 64 electronic accounts are held by Irish citizens.

Nearly two-thirds of these accounts have been established in the last two years, a surge in interest outstripping all our euro zone neighbours.

With demand for bunds at an all-time high, conditions have fallen to an all-time low.

The most attractive investment is a 30-year bond offering a return of 1.98 per cent. By far the most popular products for private investors are the safest ones: day bonds offering 0.58 per cent and five-year federal notes currently offering a return of 1.02 per cent.

It’s a sign of the times that, for a chance to own Europe’s safest securities, even seasoned investors are lining up to allow part of their investment be eaten up by inflation.

“The enormous demand for German bonds shows that these days protecting investment is greater than any yield expectations,” said Jörg Müller, spokesman for the agency.

“The interest rates have fallen as the streams of money increase from the periphery to the centre.”

To the left of the finance agency main entrance is the public branch. With its standard office furniture, coffee machine and news channel murmuring in the background, it looks like a regular German bank branch.

An anxious-looking couple speaking Italian arrive and are ushered into a side-room for a consultation.

Pat’s appointment with one of the agency’s English-speaking staff took about half an hour.

“The woman helping me asked me which bonds I wanted. I just said, ‘the most secure ones’, so we settled on five-year bonds,” he said. After that another €10,000 had left Irish banks.

Business concluded, the agency employee told him she had a steady flow of new customers from Ireland.

“She’d had Irish people in before, adamant that the collapse wasn’t their fault and blaming the ECB for setting such low interest rates,” Pat recalls. “I suggested it was like the drunk blaming the barman, and she seized at that answer.”

One swallow doesn’t make a summer, and 64 bund accounts in Irish hands does not make a bank run. However, figures from the Central Bank show a slump in Irish bank deposits in recent months, an annual rate of decline of about 11 per cent, although recent data suggests the situation has stabilised.

At an airy branch of Deutsche Bank in Berlin, however, the Irish are a noticeable phenomenon.

“We have the Irish on the phone and emailing us every day, wanting to know how to open an account,” said a senior employee, who asked not to be named.

“We’ve had at least 20 Irish in this week opening accounts, perhaps a few more: that’s an average week.”

And how much are they depositing: €10,000?

“Nobody gets on a plane for €10,000,” the employee snorts. “They’re depositing €30,000, €50,000, €100,000.”

Setting up an account as a non-resident is possible at any German bank, all of which offer guarantees of up to €100,000 through deposit protection funds, similar to Ireland.

“A foreign customer should consider what services he or she wishes from a bank,” a Deutsche Bank spokesman said. “If the customer does a lot of international business, then the Deutsche Bank can help them.”

Ask around in Berlin, and it soon becomes clear that it’s not just banks noticing an upswing in Irish custom.

“Around half of our new foreign clients are now Irish. Things picked up noticeably in the last two to three years,” said Andreas Frericks, partner with Ecovis tax consultants in Berlin.

“At the start they were investing in derivatives and termed deposits, now they’re putting millions into sites, property and, increasingly, sovereign bonds.”

A change in German tax law this year has simplified matters for non-resident depositors in Germany. A new unified tax of 25 per cent on interest earned has done away with the need to file a tax return.

Back in Dublin, brokers and economists report a market shift away from investment in equities to maximise gains to capital preservation to minimise losses.

Bloxham Stockbrokers has recently set up a fund putting money into Dutch and Finnish bonds and says 70 per cent of its new business is now going into this fund.

“I personally wouldn’t go down this route; I wouldn’t say the apocalypse is here and this is what you have to do,” said Alan McQuaid, chief economist of Bloxham Stockbrokers.

“It’s horses for courses: I have my money in Irish banks and I’m happy to leave it there. But Germany is the safest place because regardless of what happens, Germany will be there and you will get your money bank.”

As markets struggle to comprehend Friday’s dawn deal in Brussels, Pat O’Shea says he’d still rather his money guarded by a bronze tortoise in Frankfurt than an Irish banker.

“It’s a strange feeling and perhaps not the most patriotic thing to buy bunds,” he said.

“But it’s a bit like emigration: have you turned your back on your country or has your country turned its back on you?”

*Not his real name

GERMAN BUNDS: HOW TO BUY THEM

Anyone can buy bunds, either through a broker in Dublin (for a fee) or directly in Frankfurt.

The only way to open a bunds account is to appear in person in Frankfurt. The German embassy cannot assist.

Required: passport, proof of address (bank statement, utility bill), bank details (address, EU transfer codes: IBAN/BIC). The agency does not accept cash deposits.

The agency has an English-language website (www.finanzagentur.de). It can answer questions in English and advises making an appointment with one of its English-speaking staff before travelling. They can provide information about various bonds but do not give investment advice.

Accounts can be managed online, by telephone or in writing.

At the end of their term, bonds are not reinvested without express permission of customer.