German 10 Year Bond Auction Suffers Technical Failure
This morning, Germany attempted to sell €5 billion in 1.5% 10 Year bonds. It sold just €3.61 billion directly to investors (who had submitted a less than auction clearing €3.91 billion in bids), forcing the German Treasury to retain 27.8% of the auction, €1.39 billion: the highest retained amount since November 2011 when it was 39%. For one reason or another: the yield was too low at 1.42% (compared to the 1.634 average), there was much more supply elsewhere, fears of what the ECB will do tomorrow, or who knows - the real bid to cover was a paltry 0.79 (all in BTC 1.09 including government retention) compared to 1.57 at the last auction and a 1.31 average at the past 4 auctions. In other words the auction was for all technical reasons, a failure, and only the second such "failure" of 2012. The immediate reaction was Bund futures down 22 ticks at 143.28 vs 143.70 before auction as the market digested the surprising disappointment, with the German 10-year government bond yield up 2.4 basis points at 1.41 percent vs 1.37 percent before auction. In summary, if the Germans needed any more reasons that funding the insolvent Eurozone at all costs up to an including debt monetizations, which may result in failed bond auctions for German itself, are not in their best interest, they just got one. The good news: in an email sent out immediately by the German Finance agency, the bond sale was "not a risk to the budget." Wouldn't want a failed bond auction to jeopardize the budget now.
"The figures once again show that the market environment is very volatile and is holding back on purchases given upcoming decisions," the German finance agency said, referring to a pending interest rate decision from the ECB due on Thursday.
Financial markets have broadly priced in a 25 basis point cut in the ECB's key interest rates to a record low 0.5 percent on Thursday to stimulate growth and as part of its efforts to lower peripheral bond yields. Economists polled by Reuters expect a cut either on Thursday or in October.
Demand was also affected by heavy supply elsewhere in the euro zone. The Netherlands is selling a three-year dollar-denominated bond on Wednesday while triple-A rated Austria also sold bonds on Tuesday.
Only one other German auction has failed to draw bids to cover the amount on offer this year - that was the launch of the previous 10-year benchmark, the July 2022 bond, in April.
Analyst kneejerk response:
RICHARD MCGUIRE, STRATEGIST, RABOBANK, LONDON
"Soft auction out of Germany with the new 10-year technically uncovered...This stands in contrast to favourable auctions out of Austria and Belgium earlier this week although some degree of market indigestion in the wake of this supply might have proven a factor.
"Going forward, today's disappointing Bund result does not presage Germany encountering difficulty in funding itself but rather underlines the fact that, as long as the market continues to travel in hope as regards an eventual crisis solution, the cost of such funding is likely to rise with the curve operating with a bear steepening bias as a result."
ALESSANDRO GIANSANTI, RATE STRATEGIST, ING, AMSTERDAM
"It's very weak. The retention rate was the highest since November last year. The fact that the German auction is coming one day before the ECB meeting probably made investors refrain from participating. Investors are very sensitive to the ECB meeting tomorrow as the odds are that (ECB President Mario) Draghi can come out with measures that are friendly for peripheral markets and that will trigger a sell-off in Germany.
"The level of yields is really low too and ...those are the factors that have triggered a soft auction today but it's not dramatic and not the first time that has happened this year."
ANNALISA PIAZZA, MARKET ECONOMIST, NEWEDGE STRATEGY, LONDON
"Today's auction was very disappointing. Although the paper was fairly priced versus previous rolls, market dealers might have been cautious as the paper will be tapped again in three weeks, with some potential cheapening in the near term.
"Uncertainties surrounding the ECB press conference tomorrow might also explain some of the weak demand as markets might see risks of further spread tightening (versus the periphery), should Draghi comments reinforce the idea that the ECB and EU leaders are ready to do whatever is needed to save the Euro."
PETER CHATWELL, RATE STRATEGIST, CREDIT AGRICOLE, LONDON
"A weak Bund auction, with less bids than the 5 billion targeted amount. The weak auction is in contrast to price action in the roll ahead of the auction, which tightened by around a quarter of a basis point this morning, and probably reflects the sheer volume of competing 10-year core supply both last week and this week, and of course the ECB event risk. The 10-year cash yield is now above the 100-day moving average, so some of the post-auction reaction may be exacerbated by technical selling."