Failed German bond sale not complete surprise

DeclineInvestors were shocked when Germany failed to sell more than two-thirds of its new issue of ten-year bonds yesterday. It was the worst-received German bond sale since the start of the euro and called into question Germany's status as a safe haven.

But David Simner, manager of the Fidelity Funds Euro Bond Fund, said the event was not completely unexpected.

“Germany has had a history of technically failed auctions where investor demand has not adequately covered the full issuance amount and has lead to retention of bunds for later market activities,” he said.

Simner said that, unlike other sovereigns, Germany spends little time managing investor relations prior to issuing bonds. This “more hard line approach” tends to cause more volatility during auction, he said.

In addition, investors know they can trade bunds in large volumes even if they are not directly involved in an auction because the market for German bonds is large and liquid.

Simner allowed that the failure to sell all the bonds was “not helpful for the eurozone in its current, fragile state”, but said it was too early to declare an end to Germany's safe haven status.

©2011 funds europe