The cost to insure German bunds rose 7% on Wednesday, and risk premiums on the debt hit their highest over comparable U.S. Treasurys so far this year after Germany failed to get the maximum bids for its auction of new 10-year bonds.
“It just got worse: the core has become infected,” Suki Mann, credit strategist at Societe Generale, wrote in a market comment, referring to Europe’s debt crisis. Worries about sovereign debt levels in Europe have been limited to weaker euro-zone economies, in so-called peripheral members such as Greece.
The German auction has raised concern that investors are starting to shun even the continent’s largest and healthiest economies, in the so-called core countries such as Germany and France.
Five-year insurance on $10 million equivalent of bunds, sold in the form of credit default swaps, is now priced at $108,000 per year. That’s up from $101,000 per year as of the close Tuesday, according to Markit data.
Meanwhile, 10-year bunds early Wednesday traded at a premium over Treasurys of as much as 16.9 basis points-the biggest gap seen all year in their benchmark rates.
“The relative performance of U.S. and German yields has seen a spike in the premium paid by Frankfurt relative to Washington,” Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. LLC, said in a note. “Rarely this year has the benchmark 10-year U.S. yield fallen below that of Germany.”
As recently as Monday, bunds were trading tighter than Treasurys, on the order of 4 basis points, but on Tuesday that discount flipped to a premium, with bunds trading at a small spread of 0.2 basis point to U.S. debt.
“In general, bund [yields] have been below [Treasurys] for most of the last year or so,” said Elisabeth Afseth, fixed-income strategist at at Evolution Securities. “U.S. yields have dipped below German yields on a few occasions, but not as much as we are seeing today.”
Germany, which enjoys the highest credit rating of triple-A, was scheduled to sell 6 billion euros ($8 billion) of 2% bunds Wednesday, but received bids of only EUR3.9 billion and retained EUR2.356 billion-selling EUR3.644 billion of bunds, for an average yield of 1.98%.
Sovereigns typically hold back a certain amount, Afseth said. Bid-to-cover ratios were stronger earlier this year, reaching 2.2 in March-double the 1.1 ratio Wednesday.
At Germany’s last auction in October, the bid-to-cover ratio was also 1.1, but the country got EUR4.55 billion of bids for its EUR5 billion auction of 2.25% bunds, retaining only EUR925 million of the debt.
Wednesday’s bund yields of 2.062% are “not a disaster in any way, shape or form,” said Afseth, but she said, “the worrying thing is if there is any sign investors are unwilling to buy the German auction and it no longer retains absolute safe-haven status…what does that mean for other [euro-zone] nations.”
Mann at SocGen said news of Germany’s auction and its impact on spreads is the “stuff of Hollywood drama.” Mann added, “It seems nobody wants euro-zone government bonds, be they Germany or Italy.”
Source: The Wall Street Journal
