German government's issue of €7bn in bonds could have failed if Bundesbank had not retained 22% of debt issue

This article is more than 10 years old

This article is more than 10 years old

An auction of German government debt came close to failing today, while a sale of Portuguese bonds fared better.

Germany's issue of five-year bonds attracted bids of just 1.1 times the amount on offer, compared with 1.5 times at the previous auction last month. This was only achieved after the Bundesbank retained £1.55bn, or 22%, of the €7bn (£5.45bn) issue of 2.25% bonds on offer. Had this chunk of the debt remained on the table, Germany would probably have failed to find buyers for all of it.

"Certainly were it not for the Bundesbank, this would technically be a failed auction as the cover ratio would be below 1.0," said Huw Worthington, strategist at Barclays Capital.

The bonds sold today had an average yield (the interest paid to buyers) of just 1.47%. Analysts said this low yield was partly to blame for the lacklustre demand.

Yields on German debt have fallen steadily following the "flight to quality" in recent weeks during the eurozone debt crisis, as the Bundesbank had no shortage of willing buyers for government debt. Today, with stock markets rising, bond investors appeared to have lost their appetite for bunds, at least temporarily.

The German Finance Agency said the auction took place in "very volatile" market conditions, and insisted that demand for German sovereign debt across all maturities "remains unbroken".

Portugal sold €1bn of 2015 bonds at an average yield of 3.701%, drawing demand of 1.8 times the amount on offer, similar to the last auction in February. Analysts said the European Central Bank buying fringe eurozone government bonds, as part of a $1 trillion (£696bn) rescue package to stem Greece's debt crisis, also helped underpin the Portuguese auction.

"It seems clear that those issuers whose debt is actively being bought by the ECB are having no problem issuing debt, so a decent quantity of bids was to be expected," said Peter Chatwell, strategist at Crédit Agricole.

The bond sales come at a difficult time for the market, which faces around €15bn of supply this week with no redemptions of maturing bonds and little cash to pay for it.

Italy will sell up to €1.5bn eurozone inflation-protected bonds tomorrow, and up to €9.5bn of nominal bonds on Friday.