German bond auction is ‘shocking’, says Fidelity’s Simner
The recent German 10 year Bund auction sent a shiver down the collective spine of the investor community. “It was nothing short of shocking,” said David Simner, manager of Fidelity Funds Euro Bond Fund
Germany has hitherto been considered one of the safest of safe havens and has benefited from extremely low funding costs. However, he said: “the failed Bund auction has naturally led many to question the sustainability of the attractive terms that Germany has enjoyed and thence to wonder whether this new dynamic may exacerbate the wider Euro zone debt crisis.
“In many respects though, the result was not completely unexpected. Germany has had a history of technically failed auctions where investor demand has not adequately covered the full issuance amount and has lead to retention of Bunds for later market activities.
“Many of these failures stem from the German approach to primary issuance, where, unlike other Sovereign issuers who devote much time and effort to ‘investor relations’, the Germans have tended to take a more hard line approach which does cause a degree of volatility in the auction process.
“Furthermore, the size and liquidity of the Bund market allows investors to trade in large size without necessarily needing to be involved directly at auction time. The failure of the auction is a continuation of the balance sheet strains and shrinkage that has been observed over the past few quarters and coupled with a softening of risk appetite from the banking community and general tailing off of liquidity in the market has conspired to generate the ugly headlines.
The auction result once again highlights the difficulties that all European issuers now face to sell primary debt as the continued deleveraging of the banking system hits home hard, says Simner. “While some Sovereign issuers see more end investor interest than others, many auctions are initially placed with the dealers where the lack of balance sheet firepower presents a large problem. There is no chance of this improving between now and year-end.
“But it is more important with regards to 2012, where the Euro zone has roughly €800bn to sell in the primary market (vs ~ 575bn redemptions). This again highlights the urgency that is required for European authorities to find a powerful enough solution to attract capital back into the Eurozone, as one major group of buyers for Primary debt, the banks, are unlikely to return in style for a while.
The auction result is not helpful for the Eurozone in its current, fragile state. However, Simner concludes: “It’s far too early to announce some sort of end to Germany benefiting from the flight-to-quality bid.”