Bloomberg News

German Auction ‘Disaster’ Stirs Crisis Concern; Bonds, Euro Drop

November 30, 2011

Nov. 23 (Bloomberg) -- Germany failed to get bids for 35 percent of the 10-year bonds offered for sale today, propelling borrowing costs in Europe higher and the euro lower on concern the region’s debt crisis is driving away investors.

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

Turmoil 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 common currency-area bonds, while the European Central Bank resists calls to boost sovereign-debt purchases.

The yield on Germany’s 2.25 percent securities maturing in September 2021 climbed 15 basis points to 2.06 percent at 4:46 p.m. London time. The price of the bonds slid 1.370, or 13.70 euros per 1,000-euro ($1,335) face amount, to 101.550. The cost of credit default swaps on German debt rose seven basis points to 108, according to CMA prices. The euro weakened as much as 1.3 percent to $1.3327.

Belgian 10-year yields surged 41 basis points to 5.48 percent, after reaching 5.53 percent, the highest since November 2000. French 10-year bond yields climbed 16 basis points to 3.69 percent. The yield on Greek two-year notes jumped to more than 120 percent for the first time, before slipping back to 116.59 percent.

Bids Shortfall

Total bids at the auction of securities due in January 2022 amounted to 3.889 billion euros, out of a maximum target for the sale of 6 billion euros, according to Bundesbank data.

Six of the last eight bond sales by Germany have been “technically uncovered,” with fewer bids than the maximum amount on offer, Norbert Aul, a rates strategist at RBC Capital Markets in London, said in an e-mailed note.

Under the German auction system, the central bank retains securities at sales for the secondary market. In today’s offering, the debt agency allotted 3.644 billion euros of the securities, leaving the Bundesbank to retain 2.356 billion euros, or 39 percent of the supply. That’s the highest proportion of unsold debt at a 10-year sale since 1995, according to Bloomberg data. The securities were sold at an average yield of 1.98 percent. In the secondary market, the rate rose to 2.13 percent.

‘Miserable Welcome’

The new 10-year bund received a “truly miserable welcome,” said John Davies, a fixed-income strategist at WestLB AG in London. “It may now be that Germany is seen at risk either from a general flight out of euro-assets or from extreme burden-carrying.”

Banks and investors are reducing holdings of European government bonds as the debt crisis spreads. Kokusai Asset Management Co.’s Global Sovereign Open, Japan’s biggest mutual fund, sold its entire holdings of Italian government bonds by Nov. 10, a report from the fund showed. BNP Paribas SA and Commerzbank AG said in earnings reports this month they’re unloading sovereign bonds at a loss.

“If investors do not wish to buy bunds, they do not wish to buy Europe,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London.

The 10-year bund yield climbed to 21 basis points more than similar-maturity Treasuries, the most since May 2009. The new benchmark bund yield exceeded that of the 10-year gilt for the first time since March 2009.

Bunds ‘Not Immune’

“This auction result makes it all too clear that German bonds are not immune from the crisis but are being drawn into the debt swamp,” said Frank Schaeffler, a lawmaker from the Free Democratic Party, Merkel’s coalition partner. “If this doesn’t wake up the country to the current risks then I’ll be very surprised.”

The rate on the 30-year German bond climbed as much as 14 basis points to 2.75 percent, the highest since Nov. 4. Volatility on German sovereign debt was the second-highest among developed-country markets today, according to measures of 10- year bonds, credit-default swaps, and the spread between two-and 10-year securities. The cumulative change was 7.1 times the 90- day average, the Bloomberg gauge showed. Belgian debt was the most volatile, with changes at 12.5 times the 90-day average.

German Pipe Dream

“The notion some people had that Germany could be insulated against market developments was a pipe dream,” Fredrik Erixon, head of the European Centre for International Political Economy in Brussels, said in a telephone interview. “The systemic crisis in the euro zone is eating its way into countries that are solvent and have competitive economies, like Germany. But because they are in the euro zone the crisis is spreading to them.”

Germany’s Finance Agency sees no risk in financing the government’s budget after demand was weak at the debt auction today, Joerg Mueller, a Frankfurt-based spokesman, said in an interview.

The Berlin-based Finance Ministry, of which the agency is a unit, has cut planned fourth-quarter debt sales twice this year as tax revenue surged.

‘Buyers’ Strike’

At an auction of 10-year bonds last week, Spain’s borrowing costs climbed to 6.975 percent, more than Portugal and Ireland paid at their final sales of similar-maturity debt before they sought international aid.

“What we have at the moment is strong buyer reluctance -- you could almost call it a buyers’ strike -- for sovereign bonds, for European sovereign bonds of a lot of countries,” Commerzbank Chief Executive Officer Martin Blessing said yesterday during a panel discussion in Berlin.

Belgium is due to auction securities, including 10-year debt, on Nov. 28. Italy and France will also sell bonds next week.

Italian bonds fell today, even after the ECB was said by four people with knowledge of the transactions to have bought the securities. The five-year note yield jumped 31 basis points to 7.23 percent. Rates on five-year Belgian debt increased 46 basis points to 5.04 percent.

Yields on AAA rated Austrian five-year notes jumped 34 basis points to 3.23 percent, with the rate on similar-maturity French securities climbing 19 basis points to 2.84 percent. Irish five-year yields surged 97 basis points to 9.15 percent.

Economic Shocks

France will have difficulty absorbing further large economic shocks without putting its top credit rating at risk, Fitch Ratings said today.

“Similar to the situation of other major AAA sovereigns, the increase in government debt has largely exhausted the fiscal space to absorb further adverse shocks without undermining their AAA status,” Fitch said in a report. “The principal concern with respect to France is that the intensification of the euro zone crisis will generate contingent liabilities that will be crystallized onto the sovereign balance sheet.”

German bonds have returned 8.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French bonds have gained 0.9 percent and Belgian securities have dropped 3.3 percent, the indexes show.

--With assistance from Michael Shanahan in London and Leon Mangasarian, Brian Parkin and Tony Czuczka in Berlin. Editors: Mark McCord, Nicholas Reynolds

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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