German yields stay "painfully" low after another poor debt sale

Wed Feb 26, 2014 7:50am EST

Related Topics

* German 30-year bond sale "technically uncovered"

* Poor demand suggests investors unhappy with meagre returns

* German yields not seen rising either; eyes on ECB

By Marius Zaharia

LONDON, Feb 26 (Reuters) - German government bond yields held close to their 2014 lows on Wednesday even after investors shunned a second consecutive debt sale, suggesting they saw scant value in the "painfully" low returns on offer.

The 30-year bond auction attracted bids worth less than the maximum 3 billion euros target, making it the second so-called "technically uncovered" auction in a row after a 10-year debt sale last week.

Demand suffered due to the low returns, analysts said - one described the roughly 2.5 percent ultra-long yield, which compares with a medium-term European Central Bank inflation target of just below 2 percent, as "terrible".

But the limited post-auction reaction in the secondary market also suggested investors were not convinced yields should be much higher either. Many see no prospect that either growth or inflation will pick up in the foreseeable future.

Indeed, expectations the ECB will ease monetary policy further to avoid growth-crippling deflation are growing. Such a move would push yields lower.

"With Bund yields where they are, there isn't too much conviction in the Bund rally going forward," said Michael Leister, rate strategist at Commerzbank. "On the other hand, investors want to go short but they feel it is a bit difficult, especially with the ECB meeting (scheduled) next week."

Ten-year Bund yields rose slightly after the auction to trade a tad higher on the day at 1.66 percent, while 30-year yields, which had eased before the sale, fell even more, to stand 2 bps lower at 2.51 percent.

Both 10- and 30-year yields remained close to 2014 lows of 1.51 percent and 2.44 percent, respectively.

"The 30-year yield basically tells you that investors are not fearing any increase in inflation or a big pick-up in nominal growth," DZ Bank strategist Christian Lenk said.

"It does a little bit sound like Japan, although it's not comparable yet at these levels."

Thirty-year yields in Japan, which has hardly seen growth since the late 1990s and has been battling deflation in the past decade, were just over 1.60 percent.

"PAIN TRADE"

At the end of last year, most analysts predicted German yields would rise in 2014, tracking their U.S. counterparts as the Federal Reserve gradually reduces its bond-buying stimulus programme and the euro zone economy recovers.

However, benchmark 10-year Bunds yield 30 bps less than at the end of December, driven down by record low inflation and as tensions in some emerging markets channel investment flows into low-risk assets.

"(The Bund) is absolutely a pain trade and will continue to be a pain trade until the central bank will give you the signal to sell the short end," said RBS strategist Harvinder Sian, referring to any signal that the ECB was about to tighten monetary policy and push short-term interest rates higher.

Elsewhere, Portuguese five-year yields hit a 3-1/2 year low of 3.744 percent as investors welcomed Lisbon's plans to buy back short-term debt on Thursday to ease its immediate financing needs. The buyback is seen as a further step towards exiting an international bailout.

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