Germany sold a 30-year bond with a zero coupon on Wednesday, making history in the process.
This was, in a way, the ultimate litmus test for haven assets in a world where yields continue to touch new, previously unthinkable lows amid a global duration grab that manifested itself in the US last week with 30-year yields falling below 2% for the first time.
Germany joined the Swiss and the Danes with totally negative curves a couple of days into August.
As far as Wednesday’s landmark debt sale goes, it was, technically anyway, a failure. It was uncovered, with Germany selling €824 million of the bonds. They were aiming to sell €2 billion of the new debt.
The bid-to-cover was 1.05 and as Bloomberg’s Michael Read notes, “the Bundesbank retained ~58% of the issue… compared with 19.3% at the previous long-end auction”.
“[This was] weighing on rates at least initially”, Nomura’s Charlie McElligott said Wednesday, calling the results “a sign of some market duration indigestion'”.
For some, the tepid demand conjures uncomfortable memories.
“One of the ingredients for the Bund tantrum in 2015 was the poor 10y auction in mid-April, which served as confirmation to us at the time, that end investor demand at those yield levels was likely non-existent”, BofA wrote late last week. “At the same time investor positioning was long [so] there are some concerning parallels to today’s market environment – long positioning going into a 30y auction at the top end of valuations, with long-dated forward yields much richer, and at levels that cannot possibly satisfy the return requirements of LDI investors”, the bank went on to caution.
Nobody is going to be particularly concerned about weak demand at auction on Wednesday, though. The idea that this presages a “buyer’s strike” seems like an odd way to think about things at a time when demand for havens and duration is as voracious as it is currently.
Indeed, after a brief selloff, bunds perked back up. The quick rebound “is hilariously being attributed to the Street now being worried about being ‘short’ the new issue with only E850mm take-up being around and thus at risk of a squeeze higher, especially with expensive repo”, Nomura’s McElligott went on to say.
Do take note of how distorted the environment is. As BofA went on to remark, “to repeat the performance of the current benchmark, 30y yields would have to fall another 100 bp [and] while we turned constructive the long-end a while back, we hope that does not happen”.
Why does the bank hope that doesn’t happen? Well, presumably because the macro conditions that would occasion another 100bp lower in 30-year bund yields would include a deep global recession.
At the same time, the deteriorating macro backdrop makes a tantrum less likely. The ECB is clearly poised to cut rates and restart net asset purchases, the euro-area economy is weak, breakevens have collapsed in 2019, and the laundry list of geopolitical land mines likely means havens will stay bid.
Weak demand metrics notwithstanding, Bloomberg’s Read marvels at the fact that, all nuance and analysis aside, “Germany just issued 30Y debt with a zero coupon, and pricing is comparable to the 2048s with a 1.25% coupon”, which is “just another testament to the bondmania that seems unlikely to end anytime soon”.
Ironically, one of the key risks to the bund rally (and thus one of the tantrum risks to keep on your radar) is a German fiscal stimulus push, something that has been making headlines for a week straight.