LONDON, Dec 9 (Reuters) - Germany’s last bond auction of 2015 drew strong demand on Wednesday, in a sign that financial markets have got over their disappointment with the ECB’s latest monetary policy easing package and are already eyeing its next moves.
Germany sold 2.5 billion euros of two-year bonds, at an average yield of minus 0.32 percent.
The total bids at the auction reached almost 4.6 billion euros, compared with 3 billion offered. It is a significant improvement from the previous sale, which drew bids of less than 4.4 billion for a 5 billion euro amount on offer.
Borrowing costs were higher than the last auction’s record low of -0.38 percent, but more significantly were below the yield seen in the secondary market. That indicates strong willingness from investors to get hold of the paper and a conviction that yields could fall in the future.
The last two German two-year bond auctions have taken place against sharply differing backdrops.
In November, markets were pricing in a comprehensive easing package from the European Central Bank, including a deep deposit rate cut and adjustments to the size, scope and duration of the bond-buying programme.
On Wednesday, many investors were still licking their wounds after the ECB last week cut the deposit rate by just 10 basis points, to -0.30 percent, and extended the duration of its quantitative easing programme by six months to March 2017.
But the auction results suggest that expectations of further monetary policy easing could be creeping back in.
“Perhaps some investors are still betting on a rate cut,” KBC rate strategist Mathias van der Jeugt said. “When you hear(ECB President Mario) Draghi speaking he still keeps all options open.”
After the meeting, Draghi said he was confident the measures unveiled last week would help bring near-zero inflation back to the ECB’s target of just under 2 percent, but added the bank was ready to ease its policy further if needed.
Looking at oil prices, some in the bond market are betting more might be indeed needed.
The sharp post-ECB bond sell-off was quickly arrested by a drop in oil prices to their lowest in almost seven years following an OPEC decision to keep output high.
Money markets are now pricing in a one-in-three chance rates will be cut another 10 basis points in the coming year. After last week’s ECB meeting, they saw no changes in rates over the period.
“There is talk about more easing in the near term but the ECB is not was worried as the market is and will wait awhile and see if inflation increases,” said Natixis European rates strategist Cyril Regnat.
He said the ECB probably also wanted to wait for the U.S. Federal Reserve to hike interest rates, removing a layer of uncertainty.
The Fed meets next week and is expected to deliver its first rate increase in almost a decade.
Two-year German yields were flat at minus 0.32 percent, some way off a record low of minus 0.44 percent hit on Dec. 3.
Ten-year German yields were 3 bps higher at 0.61 percent in line with the rest of the euro zone and mirroring a stabilisation in oil prices after the recent drop. (Additional reporting by Dhara Ranasinghe; Editing by Toby Chopra)
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