* 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 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.
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
"(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.