July 6, 2017 / 3:33 PM / 4 months ago

Sub-zero yields get a cold shoulder at 2-year German debt auctions

* H1 2017 2-yr German debt sales sees weakened demand

* Average bid/cover ratio at 1.45, lowest since 2008

* Weaker auction results could be side effect of QE

By Dhara Ranasinghe

LONDON, July 6 (Reuters) - Demand for German short-dated government bonds at auctions in the first half of 2017 was its weakest in nine years, a sign of growing reluctance among investors to hold the expensive, negative-yielding paper.

Top-rated Germany usually sells bonds with a short maturity relatively easily. It is the euro zone’s biggest economy and its benchmark government debt issuer.

But two-year bond sales this year have met relatively lacklustre demand. Analysts suspect this is a side effect of the European Central Bank’s 2.3 trillion euro stimulus scheme that has helped keep bond yields down -- and their prices high.

The bid-to-cover ratio, which measures the degree to which demand exceeds the quantity of bonds allocated has averaged 1.45 at six auctions of two-year paper in the first half of 2017.

That is down from 1.83 in the same period last year and marks the weakest first-half for short-dated bond auctions in Germany since 2008, according to calculations based on data from the German debt agency.

It also contrasts with generally firmer demand at auctions of longer-dated paper, reflecting investors’ search for yield.

Tammo Diemer, co-CEO at the German Finanzagentur, the country’s debt management agency, said factors such as quantitative easing and post-crisis regulation may lead to a change in auction results.

“Auctions for 10- and 30-year Bunds show a very positive trend in 2017,” he said. “Especially 10-year Bunds have delivered strong results in the first half of the year.”

Measured over all auctions of Bund securities in 2017, bids exceed the amount offered by the Finanzagentur by 20 percent.

Diemer said declining bids for longer-dated bonds in 2015 came when central bank bond-buying focused on short- and medium term-dated maturities and primary dealers -- almost exclusively big banks -- significantly reduced their balance sheets.

“This year, auctions at the short end do not perform as they used to, which might be due to the unchanged negative yield environment in those maturities,” he said. “More and more investors seem to be willing to accept higher risks in return for a positive yield, which reduces demand for short-term bonds.”

Fading political risks in the euro zone have also dimmed the appeal of safe-haven German bonds.

Germany’s 2-year Schatz yields around minus 0.60 percent , above record lows hit in February around minus 0.95 percent when worries about French politics peaked.

Growing expectations the ECB is moving closer to withdrawing stimulus has also affected demand for short-dated bonds, which are most sensitive to changes in monetary policy, analysts say.

“It remains a rich market from an absolute level and it’s also a complex segment if you consider the likely discussions around how the ECB is going to end its expansive monetary policy stance in the months ahead,” said DZ Bank rates strategist Christian Lenk.

Additional reporting by Abhinav Ramnarayan, Graphic by Ritvik Carvalho; Editing by xxx

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below