Germany sold 4.86 billion euros ($7 billion) of the September 2021 bond at an average yield of 2.15 percent — the lowest at auction since at least 1999, according to data from IFR, a Thomson Reuters service.
Some investors were reluctant to buy the new debt at such expensive prices, but persistent safe-haven demand, fueled by fresh worries over the euro zone debt crisis and a gloomy economic outlook, ensured the auction received sufficient bids.
“The auction is pretty much as expected, i.e. slightly soft in terms of absolute quantity of bids, but nothing particularly poor and certainly not bad for a new issue at such a low yield. Indeed, the quality of bids looks good,” said Credit Agricole strategist Peter Chatwell.
The recent bout of extreme market tension over a second bailout for Greece and spread of the debt crisis to Italy and Spain has sent investors flocking to bonds from Europe’s dominant economy, driving yields lower.
Despite the European Central Bank calming some peripheral worries by agreeing to buy up Spanish and Italian bonds, the flight to quality has been sustained by data showing the global economy could be grinding to a halt.
Last week 10-year German yields fell to a record low of 2.028 percent.
Highlighting the sharp deterioration in investor sentiment, the auction was stronger than an equivalent sale in July which came at a much higher average yield of 2.7 percent, but failed to draw bids worth the total amount on offer.
Wednesday’s sale drew bids worth 1.4 times the amount sold, below the year’s average of 1.66, and the Bundesbank retained more of the issue that usual. The coupon on the bond, at 2.25 percent, matched the lowest ever on 10-year German government debt.
However, in a sign that some investors were still banking on further stress pushing yields even lower, the pricing was in line with secondary markets and bids in a relatively tight range.
“It’s always going to be an expensive looking auction for the market, although we think that there’s a good chance you’ll see renewed flight to quality on Bunds,” said WestLB strategist John Davies.
The next trigger for renewed stress and fresh record low yields could come next week when Italy and Spain return to bond markets after a seasonal break in new debt sales.
In the run up to next week’s auctions — a crucial test of whether policymakers have limited the spread of the region’s debt crisis — markets will look to push Italian and Spanish bond yields higher, testing the ECB’s resolve to maintain yields around 5 percent.
