February 12, 2009 2:00 am

German 10-year Bund auction fails for second successive time

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A German sovereign bond auction failed yesterday amid growing danger signs for governments as they attempt to raise record amounts of debt to pay for fiscal stimulus packages and bank bail-outs, writes David Oakley .

It was the second successive failure this year of a 10-year Bund auction - usually one of the most sought-after - as demand fell 20 per cent short of the €6bn (£5.4bn)the German government wanted.

Gary Jenkins, head of fixed income at Evolution, said: "The failure of a German bond auction is a sign of the difficulties governments are going to face in raising debt at these historically low yields."

The outcome signals trouble for governments as a record $3,000bn of debt is ex-pected to be raised this year in sovereign bonds - three times that of 2008.

German bond auction failures were rare until the credit crisis. Before the seven that failed last year, the last German bond auction not to reach its target was in July 2000, after the dotcom crash.

Carl Norrey, head of Eur-op-ean rates trading at JPMorgan said the restricted demand for this latest issue - sold at a yield of 3.28 per cent - highlighted the price sensitive nature of government bond markets as investors have ever more debt to choose from. "Price is all important in a market with an enormous supply."

With spreads between German yields and those of other eurozone countries close to record wides, investors bought other eurozone paper this week be-cause of the extra premiums they could obtain for this debt.

Greece, the lowest-rated eurozone country that suffered a downgrade last month, comfortably sold €7bn on Monday, although it had to pay much higher yields than existing debt to sell the notes.

The Netherlands was also forced to pay higher yields than existing debt to sell 10-year bonds on Tuesday.

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