Primary market demand for German government bonds

Abstract

This paper provides evidence on the drivers of demand at government bond auctions using data on more than 600 German federal government bond auctions between 2005 and 2022. Applying the model averaging technique Weighted Average Least Squares robust determinants are identified from a large set of regressors representing auction-specific, institutional, regulatory and financial market conditions. To cover different characteristics of the empirical demand curves new measures of auction demand are introduced which i.a. reflect bidders’ estimated real-time allotment expectations. The main results can be summarised as follows: Demand is positively affected by the secondary market yield of the respective security, the announcement of upcoming syndications by the issuer, the volume offered, and underpricing at previous auctions. Furthermore, central bank net purchases in the secondary market have a robustly positive effect on demand at least for short-term bonds. Robustly negative effects are found for market volatility and the regulatory introduction of the leverage ratio for banks. The most noticeable null result is that I do not find robust evidence for crowding-out-like effects where the issuance activity of comparable issuers would dampen auction demand.