Contagion Shakes The Euro Core As 10 Year German Bund Auction A "Complete And Utter Disaster"

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Earlier today Germany tried to sell €6 billion of 10 Year bunds. It "sold" €3.644 at a 1.98% yield. Which meant the German debt agency had to retain, i.e., not sell,  the 39% balance, or €2.356 billion. Said otherwise the offering was a complete disaster and as Reuters points out, one of Germany's worst bond sales since the launch of the euro, and that much higher Bund yields are coming very soon to a neighborhood near you. The sale "prompted concerns the debt crisis was even beginning to threaten Berlin on Wednesday, with the Bundesbank forced to buy large amounts of the bonds to ensure the auction did not fail. The low yields offered on the 10-year paper deterred investors from the auction, especially because of growing concerns over the cost to Germany of the escalating crisis." So what was otherwise formerly sacrosanct has just become reviled: welcome to fiat's greatest hits. The resulting 10 Year yield chart should surprise nobody. As for next steps: first the UK, then Japan, and finally the US...

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That meant the central bank had to pick up 39 percent of the 6 billion euros of debt Germany had hoped to sell to investors after banks bought just 3.644 billion euros of the issue.

 

"It is a complete and utter disaster," said Marc Ostwald, strategist at Monument Securities in London.

 

"This does not bode well, it is the worst of uncovered auctions that we've had this year and little wonder that the Bund sold off on the back of it."

 

German Bund futures, the euro and European stocks fell after the announcement of the auction results.

 

The country's debt agency said the shortfall in the sale reflected worsening market nerves on European debt markets but added it would sell back the retained amount to investors on secondary debt markets and that Germany would not face a funding bottleneck.

 

The results compared with an average retention by the central bank of 17.83 percent at 10-year bond auctions in 2011. Data from IFR, a Thomson Reuters service, showed this to be the highest Bundesbank retention since at least July 1999.

And the experts' opinion:

ANNALISA PIAZZA, STRATEGIST, NEWEDGE, LONDON

"Without the massive Buba retention the auction would have been heavily undersubscribed. The paper was priced at an average 100.15 and low price was 100.01. The auction tail was a large 14 cents after the already large 10 cents at the previous auction.

"The auction was extremely poor. Despite the new paper looking attractive versus previous rolls in the grey market, the extreme richness of the German debt weighed on today's demand for the new line."

MARC OSTWALD, STRATEGIST, MONUMENT SECURITIES, LONDON

"It is a complete and utter disaster. If Germany can only manage an 0.65 cover in actual terms for what is going to be their next benchmark then what hope for everybody else?"

"It really tells you that the Bund yields are at the completely wrong level ... never mind that they are a safe haven. This does not bode well, it is the worst of uncovered auctions that we've had this year and little wonder that the Bund sold off on the back of it."

"A lot of it relates to very low yields. The other part is that market makers don't want to have a position because of the very distressed nature of financial markets as a whole. There's certainly a partial element of 'they would rather not have euros' in there."

JOHN DAVIES, RATE STRATEGIST, WESTLB, LONDON

"The tail is moving exponentially higher and they failed to get bids for 35 percent of the auction so it's a miserable looking sale and even worse than what we saw at the Schatz auction last week.

"It perhaps goes to show the uncertainty surrounding the euro zone crisis has escalated in terms of the overall outlook to incorporate even Germany."

ACHILLEAS GEORGOLOPOULOS, STRATEGIST, LLOYDS BANK, LONDON

"It's really bad. The Bundesbank had to retain 39 percent of the issue. Bunds are starting to lose their appeal because markets have to believe the euro bonds story and Germany is very close to start, essentially, to guarantee the debt of other countries. The real bid/cover was 0.65, not 1.1."