Crisis hits German bond issue


Germany's poor benchmark bond issue today was mainly due to extremely nervous markets and not a sign of falling investor demand for German debt, the head of the German debt agency has said.

Germany failed to get bids for 35 per cent of the 10-year bonds offered for sale today, sending its borrowing costs higher and the euro lower on concern that Europe's debt crisis is driving investors away from the region.

The 10-year bond auction was perhaps the clearest sign yet that the debt crisis was spreading to Europe's biggest economy.

"We are currently seeing extremely nervous markets," said Carl Heinz Daube, managing director at the German Finance Agency. He added that there was a lot of uncertainty among investors.

The agency's issuance so far this year - with a total volume of €270 billion - "showed no signs of a real loss in appetite for (German) benchmark bonds", Mr Daube said.

Germany had hoped to sell €6 billion of debt, but commercial banks bought just €3.644 billion and the debt agency retained a larger-than-usual portion, making it one of its least successful debt sales since the launch of the euro.

The retained amount, roughly 39 per cent of the planned volume, will be sold in the secondary market.

Mr Daube pointed out that many banks had already closed their books for the year and weren't buying bonds anymore, saying the auction should not be over interpreted.

Asked if the poor result today might have an impact on auctions in the coming weeks, he said all three remaining debt sales scheduled for 2011 would go ahead as planned.

"We have so far executed every planned auction and this will be also be the case in future," Mr Daube said.

The new bond promised to pay out a 2.0 per cent interest rate - the lowest ever on an issue of German 10-year Bunds. The average yield at the auction was 1.98 per cent, down from 2.09 per cent at the last sale of the previous benchmark in October.

According to Standard and Poor's, upward pressure on German government debt yields may lead to a change in perceptions in that country on how to deal with the Euro area sovereign debt crisis.

It's "quite telling that recently there's been upward pressure on Germany," said David Beers, head of sovereign ratings at Standard and Poor's in Dublin today. "That may change perceptions there."

"This auction is nothing short of a disaster for Germany," Mark Grant, a managing director at Southwest Securities in Florida, said. "If the strongest nation in Europe has this kind of difficulty raising capital one shudders concerning the upcoming auctions in other European nations."

The debt crisis that began more than two years ago in Greece and snared Ireland, Portugal, Italy and Spain has closed in on France and now risks engulfing Germany, the region's biggest economy.

Political leaders are struggling to find a fix for the crisis, with German chancellor Angela Merkel rejecting proposals for the common currency-area bonds, while the European Central Bank resists calls to boost sovereign debt purchases.

The yield on 2.25 per cent securities maturing in September 2021 climbed four basis points to 1.96 per cent at 11.37am Irish time today. The price of the bonds slid 0.40, or €4 per €1,000 face amount, to 102.520. The cost of credit default swaps on German debt rose six basis points to 107, according to CMA prices. The euro weakened as much as 1 per cent to $1.3374.

Total bids at the auction of securities due in January 2022 amounted to €3.889 billion, out of a maximum target for the sale of €6 billion, according to Bundesbank data. The securities were sold at a yield of 1.98 per cent.