ECB uncertainty curbs demand at weak German auction
LONDON (Reuters) - A German government bond failed to attract bids worth the amount offered at its launch on Wednesday as expectations of ECB action and competing supply hit demand, producing the country's worst auction result this year.
The appeal of low-risk but low-yielding German debt has been dented and riskier euro zone bonds have rallied in recent weeks on the prospect of peripheral bond-buying intervention by the European Central Bank, expected to be fleshed out on Thursday.
"(The auction) probably reflects the sheer volume of competing 10-year core supply both last week and this week, and of course the ECB event risk," said Credit Agricole rate strategist Peter Chatwell.
Finland, Belgium and Austria, all of which carry strong credit ratings and offer higher yields than Germany, have issued similar bonds in the last two weeks while the Netherlands tapped the dollar market on Wednesday, capitalising on a low-yield environment before the ECB policy meeting.
The September 2022 bond carried a record low 1.5 percent interest rate and was sold at average yield of 1.42 percent - a level that remains very low by historical standards, but has risen from 1.126 percent since July.
Bids from investors amounted to 3.93 billion euros (3.1 billion pounds), well below the total 5 billion euros issued. Of those bids, 3.61 billion euros worth were accepted and the remaining 1.39 billion issued was retained by German authorities to be sold later.
New benchmark bond issues generally draw lower demand than subsequent top-up sales, and the only other "technical failure" at auction this year was the launch of the previous 10-year bond in April when 22.6 percent of the issue was retained.
The 28 percent retention rate at Wednesday's sale was the biggest seen this year at German nominal bond sales and far above the 18.4 percent average at all 2012's 10-year bond sales.
"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.
Thursday's meeting is expected to put more flesh on the bones of a large-scale plan to purchase bonds issued by Spain and Italy. This is seen as a vital step towards addressing the crisis and could eventually curb demand for the safety of Bunds.
"The tail risk of a euro break up is much, much diminished. There are still going to be many teething problems with regards to progressing towards a euro solution, but the fact is there is a grand plan being mooted," Rabobank strategist Richard McGuire.
In the long run that should result in a steepening of the German yield curve led by a sell-off in debt with longer maturities, with short-term rates unlikely to rise as quickly while ECB interest rates remain pinned at record lows, McGuire said.
(Additional reporting by Kirsten Donovan, editing by Nigel Stephenson)
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