The world’s first 30-year bond offering a zero coupon struggled to find buyers, signalling that negative yields across Europe may finally be taking their toll on investor demand.
Germany failed to meet its 2 billion euro target for the auction of notes maturing in 2050, selling only 824 million euros. It’s another sign that the global bond rally may be coming to a halt now that more than $16 trillion of securities around the world 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”.
The auction was at a record-low average yield of -0.11 per cent, 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.”
Casting a shadow on next stimulus round
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 — the first major market exhibiting such a trait — meaning the government is effectively being paid to borrow out to 30 years.
The sale comes as Germany is priming the pumps for extra spending should an economic crisis hit. While the nation is confined to strict laws on running a fiscal deficit, Finance Minister Olaf Scholz suggested Germany could muster 50 billion euros should a recession hit.
One of the triggers for a German bond sell-off in 2015, after benchmark yields first neared 0 per cent, was a poor 10-year auction that highlighted a loss of demand at low yield levels.
“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.”