Germany fails to hit auction ceiling for Bunds

In a further sign of the eurozone debt crisis spreading from its periphery to its core, Germany failed by a wide margin this morning to sell the maximum allocation of Bunds to investors.

Bids for securities maturing in January 2022 were €3.9bn, well below the auction’s maximum target of €6b, according to the Bundesbank. The securities were sold at a yield of 1.98%.

After the target was missed by 35%, yields on 10-year German debt rose higher than the similarly dated Treasuries. Ten-year US Treasuries yield 1.93%.

Germany’s central bank had to retain €2.4bn of the issue, which was about twice the average rate retained for such auctions.

The retention rate suggested investors are shying away not just from peripheral eurozone debt, but also now the core.

Michele Patri, fund manager at Alliance Bernstein, said: “The relationship between Italy, France and Germany is very strong.” He noted trade between troubled Italy and Germany was bigger than between the much-vaunted links between Germany and China.

Patri’s AllianceBernstein Flexible European Equity Strategy made 2% net from launch in February 2010 to 30 September 2011, and is very defensively positioned at about 14% net long.

A growing number of fund managers have been shorting Bunds recently, expressing fears over contagion, and the high asking price of such ‘safe haven’ assets.

Barclays Wealth noted recently the debt-weighted 10-year yield for AAA eurozone countriesis at its lowest level since the euro’s inception, while yields for those rated A or lower is by far at their highest.

F&C Thames River bond managers Peter Geikie-Cobb and Paul Thursby have shorted Bunds for six weeks.

Geikie-Cobb said: “The bond market has reached the counterpoint of contagion and Germany can no longer be regarded as a safe haven as it is certain the German deficit will deteriorate if the ECB does not step in to support the market.

“The shorts reflect our view that all bond markets, with the exception of Japan, are hideously overvalued.”

David Roberts, manager of two bond funds at Kames Capital, was shorting five-year German debt recently. He said: “Believing a 1.7% per annum return for owning 10-year Bunds is the best risk-free option is wrong, when the investment is subject either to the uncertainty created by a eurozone break up, or the cost of holding the system together.”

Mark Grant, a managing director at America’s Southwest Securities, told Bloomberg that the result of Germany’s debt auction today was “nothing short of a disaster for Germany”.

Patri said the eurozone’s outlook would likely deteriorate further this year, with mid- and lower-tier companies starved of bank credit. “Companies with a lot of debt that needs refinancing in 2012 are at risk. It is only when banks refinance themselves that that will be a very strong message.”

Europe’s leaders will ultimately engage in a form of quantitative easing, he said. “If something effective is not delivered it will make [the collapse of] Lehman Brothers look like a walk in the park.”



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