LONDON: Germany sold 5.86 billion euros of new two-year government bonds on Wednesday drawing solid demand, supported by appetite for the highest-rated, most-liquid paper with talk of a Greek debt restructuring rattling markets.
The sale saw a bid cover ratio of 1.9, in line with the 2011 average. The Bundesbank retained 16.3 percent of the issue, in line with a previous 2-year auction in April but compared with an average 17.8 percent at other Schatz auctions this year, according to Reuters data.
COMMENTARY:
PETER CHATWELL, RATE STRATEGIST, CREDIT AGRICOLE, LONDON
"The flight-to-quality bid has held up to see the auction covered solidly enough. But the bond has cheapened up by around 1 basis point this morning relative to the outgoing Schatz benchmark, and the larger tail points to an underlying decline in desire to pay up for the bond. Today's re-steepening of the euro swap 2s10s slope has been a beneficial backdrop."
MARC OSTWALD, STRATEGIST, MONUMENT SECURITIES, LONDON
"Very solid bidding. I am not really surprised (given) what's on offer (in terms of yields) in the front-end compared to Japan, US and UK.
"The really short-dated auctions in the core are not a real test of demand because of the scale of demand from foreign exchange reserve managers and from the banking sector."
DAVID SCHNAUTZ, RATE STRATEGIST, COMMERZBANK, LONDON
"Today's bid-cover ratio of 1.9 is bang in line with its year-to-date average. The 'tail', that is, the difference between the weighted average price and the lowest accepted price, was again small, so overall a smooth auction.
"Bond supply activities in the triple-A segment of the euro zone government bond market have been completed already, with only the Italian 5-year and 30-year auctions still to come on Friday. Although the situation regarding Greece does not seem to provide fresh safe-haven boosts to Bunds that much anymore, uncertainty is still high and should have underpinned the demand for short-end Bunds."
MICHAEL LEISTER, STRATEGIST, WESTLB, DUESSELDORF
"It seems again to be very well bid and pricing at the tight end of the range compared to the March 2013 Schatz. Overall it doesn't really comes as a surprise given that clearly the overall market sentiment is really supportive, not only for Bunds but in general for high quality core paper."
"We also see that the market has shrugged off the negative surprise on the inflation side with the German CPI coming in a tad higher than expected. This flight to quality is overshadowing these issues for now."
MARKET REACTION:
- Bund future down 36 ticks at 123.65 vs 123.71 before auction
- German 2/10-year yield spread 143 bps vs 143 bps before auction
BACKGROUND:
- The 1.75 percent coupon on the new bond is above that on the current 1.5 percent benchmark .
- In the secondary market, yields have fallen by around 20 bps since last week's European Central Bank meeting, when the bank confounded those expecting an interest rate hike in June, signalling that a 25 bps hike was more likely to come in July.
- The average bid-cover ratio on Schatz auctions in 2011 is 1.9, with the Bundesbank retaining an average of 17.8 percent of the issues.
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