LONDON: Bund futures fell on Wednesday and some investors shunned a sale of new German 32-year bonds as the relatively low risk they carry proved insufficient to compensate for ultra-low returns.
Germany's 2.405 billion euro sale of new 30-year government bonds drew fewer bids than the total volume offered, meaning the sale was technically uncovered.
The bid-to-cover ratio of 1.1 was far below the 2.1 seen at a top-up of 30-year paper in January and below the 1.8 that one analyst said would have satisfied the market.
This was the second poor Bund auction in two weeks after a 10-year sale suffered the same fate, showing that investors may be getting more picky about their safe-haven purchases.
"We are at very low levels of yields, particularly at the longer end in Germany, and there is no domestic demand for this sort of paper, so it was always going to be reliant on other people to come in and pick it up. And at record low yield levels, it always seemed a bit unlikely," Marc Ostwald, strategist at Monument Securities said.
"Germany is the one which is probably going to keep on delivering a lot of these 10- and 30-year auctions where technically it's not covered."
The German Bund future was down 17 ticks on the day at 140.45, having hit a session low of 140.19 after the auction results.
The 10-year German bond yield firmed 2 basis points to 1.66 percent in the secondary market, while 30-year yields rose 1.9 bps to 2.44 percent, still not far from a record low of 2.337 percent hit in January.
The 2044 bond sold at an average yield of 2.41 percent, less than the 2.62 percent achieved at the 30-year sale on Jan. 25. It carried a 2.5 percent coupon, the lowest-ever on a German ultra-long bond.
"Investors aren't paid a real yield for these bonds. They are holding Bunds to preserve their capital," said Nick Stamenkovic, bond strategist at RIA Capital Markets.
"But the amount they sold was disappointing. At such low yields, investors are reluctant to hold Bunds."
ITALIAN WATCH
The moves lower in the safe-haven debt market came as European stocks rose after forecast-beating corporate results helped soothe investor worries over the earnings season.
But the downside for the Bund future was seen limited ahead of the outcome of the Federal Reserve's policy meeting and before a bout of more Italian supply this week.
Italy will offer up to 6.25 billion euros of bonds on Friday, including five- and 10-year debt, after a sale of 8.5 billion euros in six-month treasury bills on Thursday. "The Bund auction is just before the BTP auction in Italy on Friday and usually we would expect some price concessions going into this auction, which also helps the Bund future," Rainer Guntermann, strategist at Commerzbank said, speaking before the German auction results which he expected to be downbeat.
Italian 10-year yields were little changed at at 5.67 percent, while the Spanish equivalent shed 3.2 bps to 5.84 percent.
Those yields moved sharply lower in early trade, with one trader citing sizeable short-covering by a hedge fund.
The Federal Reserve resumes its two-day meeting later, with its concluding statement expected to show the central bank is slightly more upbeat on the economy but in little hurry to raise borrowing costs.
Investors hoping for clues on the prospects of further monetary easing by the US central bank may be disappointed.
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