Auction of German Bonds Comes Up Short

Joel Anderson |

C, BAC, DB, ING, RBS, bund, treasury note, bonds, 10-year, treasury bonds, failed auction, Germany, Spain, Italy, France, Greece, Ireland, yieldsEuropean financial markets were rocked again Wednesday when an auction of German bonds, or bunds, only managed to sell 60 percent of the $8.1 billion of 10-year notes the German government was offering. The auction only managed to sell $4.86 billion worth of bunds with a yield at 1.98 percent, prompting greater concerns for the solvency of the Euro Zone economies.

Only 60 Percent Demand for Bunds

The failed bund auction is a major blow to the already ailing European Union as Germany has long been viewed as the lone stalwart against volatility. “This auction is nothing short of a disaster for Germany,” Mark Grant, of Southwest Securities Inc., told the Washington Post. “If the strongest nation in Europe has this kind of difficulty raising capital one shudders concerning the upcoming auctions in other European nations.” The fact that investors were unwilling to invest in German debt prompted stocks to slip in Europe and the United States with major banks among the hardest hit. Deutsche Bank AG (DB) is down over 3 percent, ING Groep NV (ING) dropped over 4.5 percent, and The Royal Bank of Scotland Group plc (RBS) lost over 7 percent. Major American banks were not immune. Coming on the heels of news that a new round of Federal Reserve stress tests would begin in January, the poor bund auction led to drops for Bank of America (BAC) and Citigroup (C). Major American banks were recently revealed to have large exposures to European debt, particularly in France, that could be much riskier than initially anticipated if Germany proves to be less stable than was assumed.

Low Yield Hurts Demand

The lack of demand for bunds can most likely be blamed on their low yields. With Germany providing nearly 20 percent of the backing for the European Central Bank (ECB), investors believe that there is more risk involved in the country's 10-year notes than the 1.98 percent yield would indicate. With yields in Spanish and Italian auctions pushing 7 percent in recent months, a crucial benchmark that Ireland, Portugal, and Greece all required bailout after reaching, and French auctions seeing higher rates as well, Germany has been profiting as the stalwart against European volatility and a safe-haven for spooked investors looking for a place to park their money. German bunds have enjoyed a very low yield as investors flocked to their notes amidst the larger Euro Zone debt crisis. However, questions have started to arise concerning Germany's relative stability. With the European Central Bank engaging in buying programs to keep down yields for Italy, France, and Spain, Germany's role as financial backer to the Euro Zone has begun to lead investors to see increased risk in its debt.

"A growing number of institutional investors have reservations about German government bonds," said Eugen Keller, of the Frankfurt-based private bank Metzler. "If Germany's responsibility for the European Financial Stability Facility (EFSF) euro backstop fund should increase, the risk for German sovereign bonds will also increase." Though, ironically, Keller adds that the low yields on bunds may drive investors right back to the higher-risk bonds that are causing the issue in the first place, saying "Because of the low rate of return in Germany, some investors are now cautiously going to countries that they had recently avoided. In France, or even in Ireland, chances for returns are certainly promising."

The Euro also slipped on news of the failed bund auction, with the embattled currency trading 1.2 percent lower against the dollar.

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