September 26, 2012 / 1:06 PM / 5 years ago

Low returns hurt demand at German 10-year debt sale

* Demand at auction fails to meet targeted 5 bln euros

* Second technically uncovered 10-year auction in a month

* Yields fall in secondary market on Spanish concerns

By Emelia Sithole-Matarise and Sarah Marsh

LONDON/BERLIN, Sept 26 (Reuters) - Germany failed to attract enough demand to meet its 5 billion euro target at a sale of 10-year bonds on Wednesday, as a record low rate of return deterred investors despite market jitters over when Spain would seek a bailout.

German authorities had to pick up 36 percent of the debt after commercial banks bought just 3.951 billion euros of the issue, meaning the sale was technically uncovered.

Uncovered auctions are not uncommon for Germany, but the scale of the Bundesbank retention was exceptionally high, above an average of 19.4 percent at sales of 10-year paper so far this year. For full auction results see

The bond offered a record low 1.5 percent interest rate. Its launch on Sept. 5 also failed to attract enough bids to cover the amount offered.

“At face value it doesn’t look like a good auction. Nominal bids fell short of the 5 billion target. So once again in technical terms it is a failed auction,” said Michael Leister, a strategist at Commerzbank.

“Although, against the backdrop of the current environment and Bunds having rallied quite a bit over the past sessions, it’s obviously not a good auction but also not a disaster.”

Germany’s debt agency said Wednesday’s poorly received auction reflected a very volatile environment but said there was no danger for the country’s budgetary funding.

“The data shows a very volatile market environment, where investors are reacting by strongly holding back on purchases,” it said in a statement.

German Bund futures fell briefly to 140.69 from 140.78 just before the auction result before rallying back to hit the day’s high of 141.10 while cash 10-year yields were 8 basis points lower on the day at 1.51 percent.

The 10-year yield has risen 40 basis points since European Central Bank President Mario Draghi vowed in July to do whatever it took to save the euro.

He later unveiled measures in early August to buy the bonds of the bloc’s struggling issuers provided they sought aid but growing nervousness over when Spain would trigger the scheme have renewed demand for low-risk German Bunds.

Spanish Prime Minister Mariano Rajoy, who is facing increasingly violent protests against austerity measures, told the Wall Street Journal in an interview published on Wednesday that he was ready to seek a bailout if Spain’s debt financing costs stayed too high for too long.

“Over the medium-term, if the ECB measures begin to work and there is more movement towards a political union, (German) yields could rise,” said Nick Stamenkovic, strategist at RIA Capital Markets. “But for the moment safe-haven flows dominate and the auction may (only) take the shine of Bunds a bit.”

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