The CSU regional group chairman Alexander Dobrindt is calling for a “citizen loan” for climate protection. Sounds interesting for investors, but the return can only be guaranteed if the paper cannot be traded.
ÜFrom a political point of view, one can argue about the idea of the citizen bond for climate protection – including whether a completely conventional government bond might not be the cheaper alternative. From an investor’s point of view, this plays a subordinate role. The question here is always whether it is worth it. Two percent returns should be guaranteed by the state. Assuming that such a bond could be issued in the coming year, it is a bond with a 20-year term. If it is issued as a federal bond, it would have the top credit rating of “AAA”. Then a guaranteed 2 percent return sounds heavenly. Because the federal bond due in 2039 with a coupon of 4.25 percent is currently trading with a yield of minus 0.37 percent.
As always, the devil is in the details. While the creditworthiness is not in question, even if the issuer might not be the federal government, but a “federal climate rescue company”, the main question is how the “guaranteed 2 percent return” can last. Because the return changes due to supply and demand in the market.
Therefore, a simple federal climate bond would hardly benefit private investors. Such an attractive bond would be in great demand. In the case of a conventional placement, it would be assumed that the bonds would first disappear in the custody accounts of institutional investors. Private investors would rather get them in exceptional cases with a return of 2 percent. Rather, these should have long since adapted to the market conditions.
In order to place the “climate bond” with the citizens, other ways would be required. It makes sense to build on savings products for private investors that existed in the past. Instead of a “climate bond”, it would then have to be something like a “federal climate treasure”. The federal treasury notes, which were brought onto the market by 2012, made it possible to invest in federal debt in small denominations and were also intended to serve the creation of wealth for broad sections of the population.
But then the trade in the “climate treasures” would have to be restricted, as was the case with the “federal treasures”. Because if the guaranteed bonds could simply be sold, they would sooner or later find their way back into the custody accounts of institutional investors. Because if their yield adjusts to the market yield for 20-year bonds, private investors would get returns of more than 70 percent for their “treasures” if they were sold early – and who would want to keep the treasures for 20 years?
In this respect, everything would come down to a “climate treasure” based on the model of the federal treasury notes. They had terms of six to seven years and most recently brought a return of 1.7 percent, which was around one percentage point more than a government bond with a remaining term of six years. You could not sell federal treasury bonds, but at most return them early (maximum for 5000 euros in 30 interest days).
A “climate treasure” with a 20-year term and a yield premium of 2.37 percentage points, on the other hand, sounds more attractive, but in the end it is not. Because the six to seven years that a federal treasury note ran are a much easier time to overlook than that of 20 years. The limited liquidity requires a premium over a term of 20 years, which logically has to be significantly higher than for six to seven years.
In this respect, this would make the “climate treasures”, like the “federal treasures” once, especially interesting for small investment sums, since then the liquidity restriction would largely be eliminated.
Whether a 20-year bond is attractive for private savers – and this should and can only be about with such small sums – is another question. It is no coincidence that the federal government’s earlier private investor products had a maximum term of just seven years, because this is considered the ultimate limit of the period on which most private savers are willing to commit themselves. Nor is it a coincidence that small bonds, so-called mini-bonds, almost always have a term of five years. Because in bond trading, this is the sound limit for private investors.
The “Bundesschätze” and other products for private investors were not abolished without good reason. They had become practically insignificant for federal funding. In 2012, federal treasury bills accounted for just 7.5 billion euros or 0.7 percent of public federal debt. In 2000 it was more than 5 percent, in the second half of the 1970s it was even up to 30 percent.
It would be an expensive affair for the federal government, which would run counter to the intended goal of financing climate investments in this way. Whether an expensive bond actually brings about so much more support for climate protection in the end, one can confidently ask a question. In fact, the opposite approach might even be more promising: a bond that, as part of a national effort, does not yield a large return, but on the contrary. But it could give buyers the feeling that they have done something presentable for land and climate protection.
It is different if one intends to provide interest savers with a reasonably attractive product. But then the 20-year term is a hurdle for the reasons mentioned. It would certainly be more interesting to take up the concept of “federal treasures” and enable reinvestment after a few years.