UPDATE: German Bund Sale Strong, Defies Peripheral Relief
10 February 2010 - 12:04PM
Dow Jones News
Germany's auction of its 10-year benchmark federal bond, known
as bund, Wednesday attracted stronger demand than market watchers
had expected, with German issues, widely perceived as the safest
bet in the euro zone, benefiting from residual economic fears on
the market despite reports of a possible bailout plan for
Greece.
"[The] auction results were very good and even better than last
time as regards the b/c [bid-to-cover ratio] and the percentage
retained," said Aro Razafindrakola, strategist at Societe Generale
SA in Paris, adding that dealers paid a price eight cents richer
than the market price.
He said that this is "surprising" given the bond was expensive
in relative value terms, and also given a strengthening in risk
appetite Wednesday morning, as evidenced by a sharp tightening in
sovereign spreads.
The Bundesbank, which is responsible for conducting the debt
auctions in Germany, sold EUR4.233 billion of the bund 3.25%
January 2020 at an average yield of 3.22%, with a bid-to-cover
ratio of 1.7. The EUR5 billion issue attracted EUR7.230 billion in
offers.
"The results are very much OK given the current environment with
the Bund future more than one full point off its this year's high
at 124.53 just three trading sessions ago," said David Schnautz,
strategist at Commerzbank AG in Frankfurt.
The auction came as risk aversion eased significantly overnight
on reports that Germany and the European Union are considering an
aid package for Greece, although no concrete steps have been
decided so far.
This has resulted in tighter 10-year yield spreads between not
only Greece and euro-zone benchmark Germany, but also in the
Spanish and Portuguese pairs, as the news buoyed other peripherals.
With the likelihood of a Greek default falling, according to the
market's assessment, so have the credit default swap costs in all
three countries.
"The anti-escalation trade may well run further which could put
more pressure on Bunds not only in relative value terms within the
euro-zone government bond market but also in outright terms as some
of the flight-to-quality premiums gets priced out," Commerzbank's
Schnautz said.
However, Marc Ostwald, strategist at Monument Securities, said
ahead of the auction that the Greek rescue plan sell-off has helped
to create "the sort of concession" that was always going to be
necessary given that yields were at the bottom of the 3.10%-3.40%
range prevailing since August. The closer the market trades to
3.25%, "the more likely it is that those fund managers who have
been waiting for a setback will put money to work," he said.
One thing market participants agree on is that volatility will
prevail at least until Thursday's summit of European Union
leaders.
"Until then, the market will remain volatile," said Societe
Generale's Razafindrakola.
Deutsche Bundesbank Web site: www.bundesbank.de
German Finance Agency Web site:
www.deutsche-finanzagentur.de
-By Emese Bartha, Dow Jones Newswires; +49 69 2972 5516;
emese.bartha@dowjones.com