**German bond sale struggles to hit target
Oversupply fears hurt European bond auctions - Dec-10
**
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By David Oakley
Published: December 10 2008 18:11 | Last updated: December 10 2008 18:11
Investors shunned one of the most liquid and safest assets in the world on Wednesday as a German bond auction came close to failing in a warning sign for governments attempting to raise record amounts of debt to boost their slowing economies.
The auction of two-year bonds saw only just enough bids to meet the €7bn ($9bn) the government wanted to raise. This was almost unheard of before this year as investors typically clamour to buy these securities.
Oversupply fears hurt European bond auctions - Dec-10
Meyrick Chapman, a fixed income strategist at UBS, said: “When a German bond auction struggles, you know there are problems.
“This is a sign that demand among investors is already waning for government bonds because of the huge supply.”
Other analysts noted the yield was 2.2 per cent, about 4.5 basis points less than existing comparable bonds, which suggests the market is still in reasonable shape because of low interest rates and deflation fears.
It is also the end of the year when many banks and investors close their books and are reluctant to part with cash, which could explain the weaker demand.
However, the prevailing view among analysts is that problems in raising debt so soon after many governments have announced fiscal stimulus programmes to revive their economies are a worrying sign with vast amounts of supply due in the coming months.
Governments in Europe are expected to issue more than $1,000bn next year, while the US is expected to raise up to $2,000bn. With up to $2,000bn in government-backed bank bonds also expected next year, analysts say the market faces grave dangers of being “crowded out” as some governments struggle to raise debt or have to pay much higher yields.
There has already been much higher issuance of government-backed bank debt than expected, with $147bn raised since governments first announced they would guarantee bank bonds, according to Dealogic, the data provider.
On Wednesday, Germany’s HSH Nordbank was forced to delay the launch of a government-backed bond until the new year because of a lack of appetite among investors. The euro-denominated bond issue will be launched in the week starting January 5.
A banker said: “They couldn’t get the price they wanted. There is a lot of competition in this space, and they were having to offer big premiums to interest investors. The fact it was year-end didn’t help.”
Crucially, many German investors, who would have been the main buyers of the bond, have closed their books for the year, another banker said.
Bankers hope to price the deal, which is being managed by Commerzbank, Deutsche Bank, WestLB and HSH Nordbank at about 100bp over Bunds.
