LONDON: Two-year German bond yields pulled back from record lows on Wednesday, after a surprisingly poor bond auction result suggested waning demand for an asset that has been underpinned by expectations for more ECB monetary easing.
It was the first time since November 2011 that a two-year bond auction drew less in bids than the amount on offer.
Germany sold just over 4 billion euros of bonds after receiving bids totalling 4.4 billion, compared with 5 billion euros offered.
Such "technically uncovered" auctions are not uncommon in Germany, where debt sales often depend on investor interest on that particular day, rather than underlying demand for German debt, which is seen one of the safest assets in the world.
But auctions of two-year bonds, which are sensitive to monetary policy, have fared well in recent years as the European Central Bank has deployed unconventional tools such as long-term liquidity auctions, negative deposit rates and bond-buying.
The bid-to-cover ratio, a key gauge of demand, was 1.1 and the lowest since November 2011, according to data from Germany's finance agency.
German two-year yields hit a record low of -0.385 percent earlier on Wednesday, according to Reuters data, having fallen about 10 basis points in the past month. After the auction, they bounced back to -0.37 percent.
That is far below the ECB's deposit rate of -0.20 percent. Money markets are pricing in a cut of at least 10 bps at the ECB's December meeting.
At such low yields, demand from investors reached saturation, analysts said.
"The results are not thrilling here," said Commerzbank rate strategist David Schnautz. "At these (yield) levels ... demand is not that strong anymore, at least in the primary market."
In another sign of weak demand for bonds from the euro zone's biggest economy, the tail -- or difference between the average accepted price and the lowest accepted price -- stood at 0.009. Commerzbank's Schnautz said this was the highest in about 1-1/2 years.
Elsewhere, most 10-year euro zone bond yields fell as global security worries lifted demand for safe-haven government debt.
German 10-year Bund yields fell 3 bps to their lowest level in almost three weeks at 0.50 percent.
Gunfire and explosions shook the Paris suburb of St Denis early on Wednesday when French police raided an apartment where a Belgian Islamist militant suspected of masterminding last week's attacks in the French capital was possibly holed up.
A woman died after detonating a bomb at the scene, the French prosecutors' office said, adding that three people in the apartment had been arrested.
"There are a number of factors that are causing a bit of noise today, but of anything you could say there is a bit of safety bid for core bonds from the nervous energy around events in Paris," Rabobank fixed income strategist Matthew Cairns said.
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