Germany won't offer higher yields to "incentivise" bidders

BERLIN Wed Dec 14, 2011 1:27pm GMT

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BERLIN (Reuters) - Germany has no plan to "incentivise" bidders at its debt auctions by offering yields above market rates next year, despite having had some uncovered auctions in 2011, the head of the German debt agency told Reuters on Wednesday.

While yields in euro zone periphery countries' bond auctions have been hitting record highs in recent months on concerns about the debt crisis, safe-haven Germany's yields have hit record lows, making its debt less attractive.

Although Wednesday's two-year Schatz sale drew solid demand, three recent auctions drew fewer bids than the amount on offer, partly due to extremely low yields.

"We did not, and will not, 'incentivise' bidding beyond what market participants see fit given their appreciation of the issuer," Carl Heinz Daube said. "This approach has worked so far, and we would expect it to work in 2012."

At a November auction of 10-year bonds that market players deemed "disastrous," almost half of the paper was retained due to a shortage of bids by investors.

However, Wednesday's sale of Schatz notes with an all-time low coupon of 0.25 percent showed investors were still generally prepared to accept ultra-low interest rates to park their money in comparatively safe assets. The 0.29 percent yield was down from 0.39 percent at a similar auction in November.

"2011 was quite challenging, but in these difficult times with a lot of market uncertainty and high volatility, we are quite happy with what our auctions have achieved," Daube said on the day of its last auction of the year.

Some 820 million euros worth of paper was retained at Wednesday's sale of 4.18 billion euros (3.41 billion pounds) of Schatz notes, versus 1.185 billion at the previous auction.

Analysts said the auction was "a bit of a mixed bag," with a low yield reflecting increased demand for safe-haven paper and in particular short-term paper, and a weak bid-to-cover in view of this low return.

"When you look at things like bid-cover and the total bids and Bundesbank retention, you could say it was never going to be a great success anyway. Especially given the current yields at the front end," said Michael Leister, a strategist at WestLB.

Daube added that, while the issuance calendar for 2012 had not yet been finalized, "we expect the volume to be slightly below this year's."

"The federal budget foresees redemptions of 216 billion euros in 2012 and up to 35.3 billion euros in interest payments," he said.

Germany reduced its 2011 issuance volume significantly throughout the year due to stronger-than-expected tax revenues, cutting borrowings from a planned 302 billion euros to 275 billion euros.

"That also helped the performance of Bunds," Daube said.

The 2012 debt calendar will likely be released next week.

(Additional reporting by the London government bonds desk)

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