German bond auction fails to attract adequate demand

Bloomberg

Investors bid for 5.2 billion euros ($7.1 billion) of the bonds offered Wednesday, a level of demand that prompted the Bundesbank to retain 32 percent of the securities, according to the central bank’s Web site.

European governments want to raise money to finance more than $96 billion in bank bailouts and stave off the worst of the global recession.

Failed auction
"I would call this a failed auction," said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking unit of France’s Credit Agricole. "This was a very poor start of auction season."

The yield on the 10-year bund, Europe’s benchmark government security, rose four basis points to 3.19 percent by 5:14 p.m. Wednesday in London. The price of the 3.75 percent security due January 2019 fell 0.34, or 3.4 euros per 1,000-euro face amount, to 104.70. The two-year yield fell 10 basis points to 1.64 percent. Yields move inversely to bond prices.

Germany sold 4.1 billion euros of its 3.75 percent securities due January 2019 at an average yield of 3.12 percent Wednesday, the Bundesbank said. The government planned to sell 6 billion euros of the notes, according to Societe Generale and ING Groep.

The last time the Bundesbank retained a larger share at an auction was on July 2, when it held 2.384 billion euros, or 34 percent, of a planned 7 billion-euro sale. Under the German auction system, the Bundesbank retains notes and bonds at sales for the secondary market. Without such a system, three out of the four 10-year auctions held last year would have failed, based on a comparison of planned issuance and bids received.

Wednesday’s auction "was not fantastic," said Padhraic Garvey, the head of investment-grade strategy at ING Groep. "The market had been geared up for a successful takedown."

Euro-region governments will issue about 20 billion euros of bonds every week during the first quarter of 2009, up from 10 to 15 billion euros a week during the past two years, according to Societe Generale.

"I don’t think this is the beginning of a big negative trend," Garvey said. "Investors are starting question whether German yields are too rich. Germany is going to have a give a greater premium."