UPDATE: German Bobl Offer Seen A Difficult Sale Amid Low Yield
- (Adds further detail) By Emese Bartha Of DOW JONES NEWSWIRES FRANKFURT -(Dow Jones)- Germany's EUR7 billion tap auction Wednesday of the federal note, bobl 2.25% April 2015, may turn out to be a tough sell as German five-year yields are at record lows, while some triple-A peers look more attractive, economists say. "We anticipate a lukewarm reception," WestLB's analysts say. "The historically low outright yield levels as well as asset swap spreads at 14-month highs could dampen investor appetite even though, in our view, the German five-year sector offers further potential versus the two-year and 10-year sectors," they added. The April 2015 bobl is trading at a yield of 1.46% in early trade Wednesday, slightly off from Tuesday's record lows of 1.40%. Germany's controversial decision a week ago to ban the naked short selling of euro government bonds, credit default swaps and shares of 10 financial institutions has caused confusion in the market. Germany's subsequent offer of EUR6 billion of a 10-year bund was only narrowly covered. Flight-to-safety runs then benefited bunds more in the secondary market. The German Finance Ministry Tuesday proposed extending the ban to include all shares and euro currency derivatives not intended for hedging. Naked short selling involves the sale of an asset which isn't owned by the seller and isn't borrowed to cover the position while it is held. Some politicians have claimed the activity can be used to manipulate markets because the amount of naked short selling can dwarf sales of the underlying assets. Credit default swaps are tradable, over-the-counter derivatives that function like a default insurance contract for debt. If a borrower defaults, the protection buyer is paid compensation by the protection seller. Swap buyers may be protecting investments they own or simply making bearish bets against companies or countries. Jan von Gerich, senior analyst at Nordea, suggested the low five-year yields in the secondary market will undermine demand at the Wednesday auction. The yield level hit Tuesday "does not leave very much return in an absolute sense, while the rate does not look that good relative to the 12-month Euribor rate of 1.28% either," he said. Nevertheless, von Gerich added, a 12-month deposit doesn't enjoy the liquidity or the safety appeal of the German government bond. "Still, despite the uncertainty, the current levels do not look very good for building new long positions," he said. Barclays Capital strategists Huw Worthington and Cagdas Aksu said the bond due to be auctioned is trading at cheap levels compared with previous bobls, but German paper looks "too rich" compared with Dutch peers after a period of strong performance. "We feel switches out of Germany into the Netherlands in this area now look attractive once again," they said in a note. -By Emese Bartha, Dow Jones Newswires; +49 69 2972 5516; emese.bartha@dowjones.com Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=Y3UMkocxLPluVvv1ej%2BYlw%3D%3D. You can use this link on the day this article is published and the following day.
