GERMAN GOVERNMENT NEEDS SEEN RAISING BOND YIELDS Increased federal government borrowing needs and a growing unwillingness by foreign investors to buy mark assets could push yields in German public authority bonds higher this year, bond market sources say. "At the moment we have a sideways movement in the short-term rates. But how rates move in the long end will depend strongly on foreigners," one portfolio manager for a large securities investment house in Frankfurt said. The sources also said the government had already stepped up its borrowing programme in anticipation on increased needs. Friday's loan stock was the third this year already, the sources noted. It carried a 10-year maturity, a coupon of six pct and price of 100-1/4 to yield 5.97 pct at issue. This compared with the last issue which had a 5-3/4 pct coupon priced at 99-3/4 pct for a yield of 5.75 pct. But dealers said the terms were not enough to attract foreign investors, and the federal government would have to push yields higher in future if it wanted to borrow again soon. Sources noted federal government issues had also increased in size, with the introduction of a four billion mark volume only starting last May. One finance ministry economist said "It isn't more. It's just the size (of each bond) which has increased." He added conditions in the capital market currently remained fairly favourable for raising new debt. Until recently, federal issues sold very strongly abroad, with up to 90 pct of some being placed with foreign investors. With the recent stabilisation of the U.S. Dollar, however, foreign investors have begun to back away from the market, as hopes of further currency gains in marks diminish. Sources said the government has may have already stepped up its borrowing, having raised more than 18 billion marks. The government made net borrowings of 23 billion marks in 1986. But Bundesbank statistics showed that net borrowing through bonds was 26.6 billion. The sources said this indicated a move by the government out of other types of debt to gain access to foreign funds through the more acceptable loan stock form. Although new credit needs were partly inflated by a large amount of issues maturing recently, other factors, including the government's tax reduction program, would also reduce income next year. "The problem here will be the tax reform," the portfolio manager said. He added that the government's cut in its top income tax rate to 53 pct from 56 pct in 1988 would make it difficult for the government to reduce borrowings. The sources said the government would fall far short of covering all of its 40 billion marks in lost revenue from the tax reform by making expenditure cuts and would be forced to fall back on debt markets in one form or the other. The portfolio manager noted that besides the three federal government loan stocks so far this year, it has also fallen back twice to raise a total 6.43 billion marks through the issue of fixed-rate medium-term "Kassenobligation" notes. A finance ministry economist said the government did not expect to have any trouble keeping to its plan to borrow only a net 22.3 billion marks this year. Though many sources agreed, they added that the trend would probably not continue next year as the further tax cuts come into effect. "I would expect the efforts for a further tax reform would mean government borrowing will increase," the manager said. Bond prices last week were slightly firmer on balance, with the Bundesbank's public authority bond yield calculation falling to 5.64 pct on Friday from 5.66 a week earlier. But sources said foreign demand for the new federal government loan stock was slack, as sentiment grows that the dollar may now rise against the mark. "The demand wasn't so good," a dealer for a German bank in London said. The dollar's recent slight appreciation against the mark even meant that foreign investors have sold mark bonds recently, some dealers said.