Low Demand

The Trouble With German Bonds

Bundesadler DPA
The ten-year German bond isn't seeing the demand it once did.
  • Why it matters

    Why it matters

    The bond market is a key gauge of investor confidence and German bonds are a traditional safe haven.

  • Facts

    Facts

    • An auction of German 10-year government bonds met with surprisingly weak demand on Wednesday – the eighth sale this year in which the amount on offer exceeded the bid volume.
    • The average yield was fixed at 0.88 percent at auction, the highest rate since last October.
    • Demand for the bond rose when the bond started trading later in the day, pushing the yield down to 0.83 percent.
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    Audio

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German 10-year government bonds have long been considered a rock-solid safe haven from financial turmoil elsewhere, but lately they’ve become a victim of their own success. In such strong demand throughout the European debt crisis, their yields have fallen to relatively unattractive levels.

In April, the yield dropped to a paltry 0.05 percent, an all-time low, in the wake of the European Central Bank’s bond-buying program aimed at pumping €1.14 trillion into the euro-zone economy by end-September 2016. It meant that any investor buying the bonds would earn interest of just 0.05 percent per year on their investment.

With some investors starting to advise against buying the German bonds, the yield has since risen to over 0.8 percent, but that’s still low. An auction of 10-year bonds, known as “Bunds,” on Wednesday reflected the double-edged merits of German government paper. The German Finance Agency, which handles auctions for the federal government, put new 10-year papers worth €5 billion up for sale but didn’t manage to sell it all at first, receiving bids of just under €4.5 billion.

One might have thought that uncertainty over the prospects of Wednesday night’s Greek parliamentary vote on unpopular reforms would have boosted demand for the bonds earlier in the day. After all, if the parliament had voted no (it voted yes), there would have been no more talks on a planned €86-billion bailout and Greece’s exit from the euro zone would have become almost inevitable.

More turmoil spells more demand for reassuring Bunds. To whet the appetite of investors, the government even offered a coupon rate of 1 percent, up from 0.5 percent previously. But investors still stayed away regardless.

10-Year Government Bond-01

Of the 37 banks in the Bund Issues Auction Group, 32 banks submitted 51 bids for a total volume of €4.499 billion, the agency said in a statement. The average yield was fixed at 0.88 percent. That’s more than the German government has had to pay for a bond issue at any time since last October.

Wednesday’s auction was the eighth this year in which supply exceeded demand. The agency retained a volume of €913.5 million for so-called “secondary market operations,” to sell them bit by bit on the open market after the auction.

Investors returned later in the day. Once the auction was over, buyers began snapping up the bond as soon as it started trading on the open market. The yield fell to 0.83 percent by late afternoon and dropped further on Wednesday morning (see graphic).

That’s one reason why bond analysts such as Michael Leister of Germany’s Commerzbank weren’t especially concerned by the reticence shown by investors at the auction. On the contrary, in fact. Mr. Leister said it was remarkable that German bonds once again managed to disengage from the movement of the all-important U.S. bond market, which they so often follow.

While German bond yields fell, U.S. bond yields rose on Wednesday after Federal Reserve Chair Janet Yellen in her semi-annual testimony to Congress repeated her view that the Fed will likely hike interest rates later this year if the U.S. economy expands as expected.

Market doubts about a rate hike had grown because of the Greek debt turmoil and concern over the outlook for the Chinese economy.

 

Andrea Cünnen works at Handelsblatt’s finance desk in Frankfurt, reporting on the bond markets. To contact the author: cuennen@handelsblatt.com

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