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The world’s first 30-year bond featuring zero income struggled to find buyers, prompting Germany’s debt agency to admit the sale may have been “too large.”
The nation failed to meet a 2-billion-euro target ($2.2 billion) for the auction of notes maturing in 2050, signaling that negative yields across Europe may finally be taking their toll on demand. It’s another sign that the global bond rally may be coming to a halt now that more than $16 trillion of securities have negative yields.
“The broader conclusion is that this is an ominous sign for cash bonds,” said Antoine Bouvet, a rates strategist at ING Groep NV, looking ahead to the end of a summer lull in European issuance next month. The jury is still out on whether this is “a turning point in the long-end rates rally, as the fundamental driver of lack of faith in central banks’ ability to reflate the economy is still there.”
Dwindling expectations for inflation and growth in coming years has led the European Central Bank to hint at a new wave of monetary stimulus next month, driving a rally across the region’s bond markets. The whole of Germany’s yield curve is now below zero -- among the first major markets exhibiting such a trait -- meaning the government is effectively being paid to borrow out to 30 years.
That drew the attention of U.S. President Donald Trump, who used it to launch another push on Twitter for the Federal Reserve to lower U.S. borrowing costs. Markets are waiting for comments by Fed Chair Jerome Powell and other central bankers meeting from Friday to discuss stimulus for the global economy at a gathering in Jackson Hole, Wyoming.
The German sale comes as Europe’s largest economy is priming the pumps for extra spending in the event of a crisis. While the nation is confined to strict laws on running a fiscal deficit, Finance Minister Olaf Scholz suggested Germany could muster 50 billion euros ($55 billion) should a recession hit. The economy contracted in the second quarter.
The country only sold 824 million euros of the zero coupon bond at a record-low average yield of -0.11%, while the Bundesbank retained nearly two-thirds of the debt on offer. The real subscription rate -- a gauge of demand that accounts for retentions by the Bundesbank -- fell to 0.43 times against 0.86 times at the previous sale of similar maturity bonds on July 17.
“This shows that there is less demand for 30-year bonds at negative yields,” said Marco Meijer, a senior fixed-income strategist at BNP Paribas SA. Still, Meijer doesn’t “see yields rising a lot in Europe.”
Germany’s debt agency said it was aware that the auction with a zero coupon might fail to drum up large investor interest.
“In the current environment it is difficult to issue in large volume a bond of this maturity,” said spokeswoman Alexandra Beust in Frankfurt. The agency “doesn’t view the sale as a failure -- it doesn’t cause us a problem as we can take the remainder on our own books.”
German 30-year bonds erased declines after the comments, with yields steady at -0.15% after having risen three basis points earlier in the day. Those on 10-year securities also steadied at -0.69%, near a record low touched earlier this month.
One of the triggers for a German bond selloff in 2015, after benchmark yields first neared 0%, was a poor 10-year auction that highlighted a loss of demand at low yield levels.
This time around, Commerzbank AG had expected demand to come from life insurers and macro investors, despite the yield curve flattening in recent weeks to drive down long-dated yields. German 30-year bonds are still attractive for U.S. investors, when hedged for currency swings, offering around a 2.6% yield, relative to around 2% on a 30-year Treasury.
“It is technically a failed auction,” said Jens Peter Sorensen, chief analyst at Danske Bank AS. “I am not all worried about this -- as investors can always just buy in the future and do not need to participate in auctions.”
(Updates with German debt agency comments.)
--With assistance from James Hirai, Charlotte Ryan and Brian Parkin.
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