German government bond sale sees better demand

LONDON Wed Jan 4, 2012 1:37pm GMT

A man takes a picture with his iPad of the Brandenburg Gate as it is illuminated during the Festival of Lights in Berlin October 12, 2011. REUTERS/Fabrizio Bensch

A man takes a picture with his iPad of the Brandenburg Gate as it is illuminated during the Festival of Lights in Berlin October 12, 2011.

Credit: Reuters/Fabrizio Bensch

LONDON (Reuters) - Germany sold more than 4 billion euros (3.3 billion pounds) of 10-year government bonds on Wednesday, seeing better demand than at a "disastrous" sale last year, though rock-bottom yields kept some investors sidelined.

The euro zone's powerhouse economy sold 4.06 billion euros of the bonds, still seen as the bloc's least risky, with its first auction of the year seeing a pick-up in demand thanks in part to large coupon and redemption payments to investors.

Demand was notably better than at the bond's November launch which was one of Germany's least successful debt sales since the introduction of the single currency.

In a brisk start to the 2012 debt auction calendar, France seeks to sell up to 8 billion euros of bonds on Thursday. However, the key test of investor sentiment comes next week when Spain and Italy - the two countries most exposed to an escalation of the crisis, kick off their funding campaigns.

When the German January 2022 bond was first sold, bids were worth less than the 6 billion euros on offer. With the Finance Agency retaining almost 40 percent of the paper at the auction, an operation conducted over a Bundesbank platform, the sale was technically uncovered and widely termed "a disaster."

Wednesday's sale drew bids worth a healthier 1.3 times the amount on offer.

"(The bid/cover ratio) was above one, which the market will see as a decent start for the year because the previous one in November was a shocking one," Lloyds Bank rate strategist Achilleas Georgolopoulos said.

"Good redemptions helped...despite a slight risk-on mood today."

Germany repays a 25 billion euro bond on Wednesday as well as making more than 12.5 billion euros of coupon payments.

The 2022 bond pays a coupon of just 2.0 percent, the lowest ever on German 10-year debt, and the average yield dropped to 1.93 percent from 1.98 percent at the last sale.

The dwindling returns on offer due to the sharp rally in safe-haven assets as the euro zone debt crisis has intensified have led to lower than average demand at recent German auctions, especially on days when financial markets have been in "risk-on" mode and more inclined to buy stocks than bonds.

"From a relative value perspective, the bond was expensive compared to the German curve," said DZ Bank rate strategist Michael Leister.

"It's not a good auction, but it's not a surprise. For a good auction we need a pronounced flight to quality environment which we didn't get in the past couple of days."

Demand at Wednesday's auction was still below the 2011 average bid/cover ratio of 1.54 at 10-year sales, according to Reuters data and the 19 percent retention rate was above the average if November's exceptionally large amount is excluded.

Germany plans to issue 250 billion euros of debt in 2012, down from 275 billion euros in 2011, including 170 billion euros of conventional government bonds.

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Graphic of 2012 euro zone govt bond supply and redemptions: link.reuters.com/gev45s

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This week's supply is focused on so-called core euro zone issuers. France's sale comes under the shadow of a possible cut to its triple-A credit rating in the days ahead.

Italy's 2012 debut bond sale will be a particular focus with 10-year yields again approaching the 7 percent level widely seen as unsustainable.

March Bund futures were up 4 ticks on the day at 138.23, compared with 137.90 before the auction. The 2-10 year German bond yield spread was little changed at 172 bps.

(Graphic by Kirsten Donovan and Vincent Flasseur, editing by Nigel Stephenson)

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