German Debt Demand Rises After ECB Letdown Pushes Yields Higher

  • Bid-to-cover ratio rises from record low in previous auction
  • Nowotny calls market's pre-ECB stimulus expectations `absurd'

Investors are having to pay slightly less for the privilege of lending to Germany.

The nation sold 3 billion euros ($3.3 billion) of two-year government debt Wednesday. The bid-to-cover ratio, a gauge of investor demand, rose from the lowest on record. Yields across the region rebounded from the lows touched in the run-up to the ECB’s policy meeting, after the Dec. 3 decision damped investors’ expectations of more aggressive easing measures. ECB policy maker Ewald Nowotny said the financial community misjudged the state of the economy and thus had “absurd” expectations for more stimulus last week.

Nowotny’s comments are a “little disingenuous,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. “It is all well and good to say that the market expectation was absurd and overdone but the ECB did absolutely nothing” to undercut those expectations. “That is a big part of why we saw such a big reversal in markets.”

German two-year note yields were little changed at minus 0.32 percent as of 4:52 p.m. in London. The price of the zero percent security due December 2017 was 100.645 percent of face value. Benchmark 10-year bund yields rose three basis points, or 0.03 percentage point, to 0.60 percent.

Investor demand for the two-year notes sold Wednesday increased to 1.81 from 1.074 at the previous auction on Nov. 18. The securities were allotted at an average yield of minus 0.32 percent. That compared with a record-low minus 0.38 percent last month.

False Signal

“I believe it was really a massive failing of market analysts,” Nowotny told reporters in Vienna on Wednesday. “I don’t believe the ECB’s communications policy gave a false signal.” The ECB’s announcement last week triggered a selloff in euro-region bonds and boosted volatility.

Across the euro area, shorter-dated yields had steadily slipped, with some touching record lows before the ECB meeting on the view that the central bank would expand its bond-buying program. The daily yield range on German two-year notes has dropped in recent days after touching the widest in more than four years on Dec. 3.

Cantor’s Callan said European bonds would remain range-bound heading into the U.S. Federal Reserve Dec. 15-16 meeting, at which futures markets are predicting an increase in interest rates for the first time since 2006.

“People will be reluctant to act on what the ECB says for the next week or two,” Callan said. “Once the Fed is out of the way then maybe we can get a bit more of a clear understanding of if the ECB is being impacted by what the Fed is doing.” A very hawkish Fed can put pressure on European bonds, Callan added.

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