September 5, 2012 / 10:20 AM / in 5 years

UPDATE 1-German bond auction struggles as ECB expectations weigh

LONDON, Sept 5 (Reuters) - A German government bond failed to attract bids worth the amount offered at its launch on Wednesday -- only the second such failure this year -- as expectations of ECB action and competing supply hit demand.

The appeal of low-yielding German debt has been dented and riskier euro zone bonds have rallied in recent weeks on the prospect of bond-buying intervention by the European Central Bank, expected to be fleshed out at a meeting on Thursday.

“(The auction) probably reflects the sheer volume of competing 10-year core supply both last week and this week, and of course the ECB event risk,” said Credit Agricole rate strategist Peter Chatwell.

The average yield at the auction was 1.42 percent.

Bids from investors amounted to 3.93 billion euros, well below the total 5 billion euros issued. Of those bids, 3.61 billion euros worth were accepted and the remaining 1.39 billion was retained by German authorities to be sold at a later date.

The 28 percent retained was far above the 18.4 percent average at 10-year bond sales this year, underscoring the weak demand.

“The figures once again show that the market environment is very volatile and is holding back on purchases given upcoming decisions,” the German finance agency said, referring to a pending interest rate decision from the ECB due on Thursday.

Financial markets have broadly priced in a 25 basis point cut in the ECB’s key interest rates to a record low 0.5 percent on Thursday to stimulate growth and as part of its efforts to lower peripheral bond yields. Economists polled by Reuters expect a cut either on Thursday or in October.

Demand was also affected by heavy supply elsewhere in the euro zone. The Netherlands is selling a three-year dollar-denominated bond on Wednesday while triple-A rated Austria also sold bonds on Tuesday.

Only one other German auction has failed to draw bids to cover the amount on offer this year - that was the launch of the previous 10-year benchmark, the July 2022 bond, in April.

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