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UPDATE 2-Meagre returns, Moody's warning hurt German bond sale
July 25, 2012 / 10:57 AM / 5 years ago

UPDATE 2-Meagre returns, Moody's warning hurt German bond sale

* Berlin holds back higher-than-usual amount of targeted size

* German borrowing costs still hit record low

* Investors pay Berlin to park cash in inflation-linked debt

By Emelia Sithole-Matarise and Michelle Martin

LONDON/BERLIN, July 25 (Reuters) - Meagre returns and a reminder of the potential cost to Germany of bailing out Spain and Italy hit a sale of Berlin’s ultra-long bonds on Wednesday, highlighting that Europe’s powerhouse is not immune to the debt crisis.

The 2.17 percent yield on the sale of 32-year German bonds, however, was still lower than the 2.434 percent in Tuesday’s auction of three-month Spanish debt, and investors even paid Berlin to park their cash in inflation-linked bonds sold later.

The German sales followed a poor auction by triple-A rated peer the Netherlands, after Moody’s Investor Services revised both countries’ ratings outlooks to negative, citing escalating costs of the debt crisis for core euro zone states.

Although Germany’s costs to borrow over 30 years fell to a record low at the auction, banks bid for only 2.32 billion euros of the 3 billion euros Berlin was aiming to sell.

German authorities were left holding a higher-than-usual 22.6 percent of the targeted amount for sale in secondary markets at a later date.

This was higher than the 20 percent retained when the bond was first issued in April when Germany also struggled to attract demand.

“It is relatively soft. The about 22 percent (held over) is at the upper end of what they usually do,” said Eric Wand, a rate strategist at Lloyds Bank in London.

“It was not the greatest timing (following Moody’s outlook revision) ... and at the margin recent changes in various countries’ pension regulations also weighed on it.”

Bund futures fell to a session low of 144.29 after the sale, down as much as 74 ticks on the day, with German 30-year yields up six basis points at 2.21 percent.

Bunds were also weighed down before the auction by comments from ECB policymaker Ewald Nowotny that he saw merit in giving the euro zone’s permanent rescue fund a banking licence, a move that would give the fund more firepower to tackle the debt crisis.


The sale’s 21 cent “tail” - the difference between the lowest bid and the average bid - reflecting the poor quality of bids - was the biggest tail at any German auction this year.

“It is a rather soft auction with a larger tail than the previous auction, offsetting the positive of a better technical bid cover ratio,” said Peter Chatwell, a rate strategist at Credit Agricole.

“Selling the 30-year paper was always going to be rather difficult, given the low absolute yield and the possibility of structural steepening of 10s/30s in core markets.”

The weak auction highlights how surging demand for the safety of German bonds has resulted in investment returns that mean Bunds are no longer attractive for some investors.

Moody’s move was also a reminder that Germany may have to dilute its credibility by underwriting the debt of struggling euro zone members.

“There’s a growing concern that Germany ultimately will have to share the burden of keeping the euro intact,” said Nick Stamenkovic, rate strategist at RIA Capital Markets.

A German sale of 752 million euros worth of 11-year inflation-linked bonds fared better, with average yields falling into negative territory, benefiting from a sell-off in their Italian equivalent after a ratings downgrade.

Moody’s two-notch downgrade of Italy’s credit rating earlier this month will push Italian inflation-linked bonds out of the influential Barclays investment indices at the end of this month, forcing some investors to sell the debt.

France, which has the biggest and most liquid inflation-linked market in the euro zone, is expected to benefit most from outflows from Italy, as investors look for relatively safer but higher-yielding investments than Germany. (Writing by Emelia Sithole-Matarise; Editing by Jeremy Gaunt and Susan Fenton)

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