August 24, 2011 / 10:51 AM / 8 years ago

Ultra-low yields limit demand for new German bond

* Average auction yield 2.15 pct, lowest since at least 1999

* Demand below average but flight to quality ensures smooth sale

By William James

LONDON, Aug 24 (Reuters) - Germany launched a new 10-year benchmark bond at auction on Wednesday with record low yields limiting demand, but investors’ desire to hold safe-haven assets was sufficient to see the new issue smoothly taken down.

Germany sold 4.86 billion euros of the September 2021 bond at an average yield of 2.15 percent — the lowest seen at auction since at least 1999, according to data from IFR, a Thomson Reuters service.

Some investors were reluctant to buy the new debt at such expensive prices, but persistent safe-haven demand, fuelled by fresh worries over the euro zone debt crisis and a gloomy economic outlook ensured the auction received sufficient bids.

“The auction is pretty much as expected, i.e. slightly soft in terms of absolute quantity of bids, but nothing particularly poor and certainly not bad for a new issue at such a low yield. Indeed, the quality of bids looks good,” said Credit Agricole strategist Peter Chatwell.

The recent bout of extreme market tension over a second bailout for Greece and spread of the debt crisis to Italy and Spain has seen investor flock to the safety of German bonds, driving yields lower.

That flight to quality has been compounded by data showing the global economy could be grinding to a halt, which last week pushed cash market yields to a record low of 2.028 percent.

The sale drew bids worth 1.4 times the amount sold, below the year’s average of 1.66, and the Bundesbank retained more of the issue that usual. The coupon on the bond, at 2.25 percent, matched the lowest ever on 10-year German government debt.

However, in a sign that some investors were still banking on further stress pushing yields even lower, the pricing was in line with secondary markets and bids in a relatively tight range.

“It’s always going to be an expensive looking auction for the market, although we think that there’s a good chance you’ll see renewed flight to quality on Bunds,” said WestLB strategist John Davies.

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