German 10 Year Bund Auction Fails To Cover Issuance As Contagion Rages At The Core

Tyler Durden's picture

If that headline is confusing to readers, it simply means, in a polite way, that Germany had a failed Bund auction. The country sold €4.075 billion in 10 Year Bunds after it had attempted to sell €5 billion and got just €4.55 billion in bids. The result made it "technically uncovered" and reflects the fear in the market that Germany will be forced to shoulder the burden of the EFSF expansion. And even with this poor result, the OAT-Bund spread still managed to blow out to another all time record of 115 bps overnight. The contagion at the core is there.

Reuters has more on the internals:

Germany sold 4.075 billion euros in its final reopening of the September 2021 bond, bringing the outstanding amount to 16 billion euros. A new January 2022 benchmark will be launched in November. The bid/cover ratio at the sale was 1.1, below the 1.5 at the previous sale in September and the 2011 average at 10-year Bund sales of 1.61, according to Reuters data. But with a target amount of 5 billion euros -- the Bundesbank retained 0.925 billion euros -- the 4.55 billion euros of bids drawn did not match the amount on offer.

 

The last 10-year auction deemed a technical failure was in July. "Looking at the bid/cover and the fact that ... we're facing an undersubscribed auction it shows that when risk appetite is on the rise it's difficult for the Finanzagentur to find enough demand out there," said WestLB's Leister.

And overall commentary:

Germany saw poor demand for its 10-year bonds at an auction on Wednesday as a modest pick up in equities hit appetite for safe-haven debt and low yields failed to lure investors. It was the second weak result in a row for Germany, with a 30-year bond sale last week also technically uncovered despite chunky cash inflows from coupon and redemption payments. Shares and the euro were higher, and German Bund futures lower, before the sale on optimism policymakers will take major steps at a weekend summit to resolve the euro zone debt crisis. "It's a continuous story that we've had over the past couple of weeks that if risk appetite is somewhat better we have very weak demand for German auctions," said WestLB rate strategist Michael Leister.

 

Bund futures extended losses after the auction, hitting a session low of 134.32, down more than a full point on the day, while 10-year yields in the secondary market were 10 basis points higher at 2.12 percent. "Poor demand for expensive paper," said Annalisa Piazza, a strategist at broker Newedge. "Market dealers seem to have been more driven by valuations this time around." But analysts said there was no threat to Germany's ability to fund itself. "I don't think it's a big worry for German credit perception," said ING rate strategist Alessandro Giansanti. "It's more a technical issue given the low level of yields and no strong appetite to buy at those levels, especially when you have some corporate bond issuance coming at a generous discount with attractive yields."

 

Financial markets have been volatile in recent sessions, as expectations of a swift decisive resolution to the euro zone debt crisis rise and fall. After German Finance Minister Wolfgang Schaeuble warned on Monday that there would be no definitive solution at a European Union leaders' summit this weekend, equities and other riskier assets rallied on Wednesday on reports -- later denied -- that an agreement had been reached to increase the firepower of the euro zone's rescue fund .