Germany Buys Itself First-Class Ticket on Titanic: Euro Credit

By Mark Gilbert, Lukanyo Mnyanda and Emma Charlton
Nov. 24 (Bloomberg) -- When the Titanic sank in 1912, even its first-class passengers ended up in the sea. Germany’s failure to attract bids for all the bonds it wanted to sell yesterday suggests investors are growing wary of lending to even the euro region’s most creditworthy nation.
Germany’s 10-year borrowing cost dropped to a record 1.64 percent on Sept. 23 as bunds offered a refuge from the debt crisis. The rate now exceeds 2 percent, driving the gap with U.S. Treasuries to a 30-month high, after bids at the sale of securities repayable in January 2022 fell 35 percent short of the 6 billion euros ($8 billion) offered yesterday.
Bunds are losing the haven status they share with Treasuries as Germany rules out common bond sales to solve the debt crisis, and argues against the European Central Bank becoming the lender of last resort. As recently as Nov. 10, bunds yielded 28 basis points less than the American debt. Ten- year yields advanced to a four-week high of 2.24 percent today in London.
“The Titanic and the single currency cannot continue in its current form,” said Stuart Thomson, who helps oversee about
$121 billion at Ignis Asset Management in Glasgow. “Safety lies in another ship, RMS Political Union, which is just over the horizon. It remains to be seen whether the third-class passengers of the peripheral economies and the second-class passengers of the semi-core will be willing to decamp from their current luxury liner to this cramped tramp steamer.”

October Accord

An all-night summit of European leaders in October failed to calm investors after producing a pledge to write down Greece’s debt, recapitalize banks and strengthen the region’s rescue fund. Former Greek Prime Minister George Papandreou spooked markets by calling for a national vote on the agreement to rescue the country, a proposal he later withdrew.
Germany opposes a plan that would raise money for indebted nations by issuing joint euro-region bonds because it would probably lose its top AAA rating under such a program. It also wants to have a more integrated budget to police spending across the region to prevent future debt crises.
Michael Meister, finance spokesman for German Chancellor Angela Merkel’s Christian Democratic bloc, rejected calls this week for Europe’s largest economy to do more to counter market turmoil. Germany doesn’t possess a “new bazooka,” he said on Nov. 22.
Bunds also yield more than 10-year U.K. government bonds for the first time since March 2009. Investors demanded 3 extra basis points to hold 10-year bunds rather than benchmark gilts today. That compares with an average yield difference, or spread, of 40 basis points in Germany’s favor over the past year.

New Commitment?

“Up until a few weeks ago, it was fairly easy for clients to justify an investment in bunds,” said Jim Reid, a global investment strategist at Deutsche Bank AG in London. “We’re getting to the point where either Germany has to make a huge commitment or they won’t. The market may not be prepared to take that risk at these yields.”
Germany’s Finance Agency sees no risk in financing the government’s budget, Joerg Mueller, a Frankfurt-based spokesman, said in an interview yesterday. The agency allotted 3.644 billion euros of the securities, leaving the Bundesbank to retain 2.356 billion euros, or 39 percent of the supply.
“It’s a wakeup call for Germany,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “Investors are starting to turn more cautious on Germany, which has been the hallmark of stability.”

Selling Out

Yields are rising as failure to end the crisis fuels speculation the 12-year old monetary union will collapse under the weight of austerity and recession.
European industrial orders declined by the most in three years during September, led by Germany and France, the European Union’s statistics office in Luxembourg said yesterday.
“It seems as if international investors, mainly from Asia and the U.S., are selling out of euro-region assets all together,” said Nicola Marinelli, who oversees $153 million at Glendevon King Asset Management in London. “In all this mess, the bund isn’t rallying, so that shows there may be a full blown divestment of euro-region assets.”
Almost half of 984 clients surveyed by Barclays Capital expect at least one country to leave the euro in 2012, double the proportion two months ago, a report published yesterday showed. About a quarter said they expect the euro to break up.
“It’s becoming increasingly difficult to see how we get through this without some sort of restructuring of the euro, which we hope will only sacrifice Greece,” Bill Dinning, head of strategy at Kames Capital in Edinburgh, said on Nov. 18.

U.S. Budget

It’s too early to say that Germany has lost its safe-haven status, with yields close to record lows in the secondary market and U.S. lawmakers at odds over that country’s fiscal problems, according to Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London.
“If you take into account global assets, where do you go?” Green said by telephone. “You’ve got other leading economies that have their own issues.”
German bonds gained 0.2 percent this month as of yesterday, while U.S. Treasuries returned 1.2 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Austrian, French, Dutch and Finnish securities lost between 0.9 percent and 5 percent.
“The crisis has had a short-term positive effect for Germany in that it has lowered the borrowing costs because people are willing to pay a premium for the security of German bonds,” said Gianluca Ziglio, a London-based interest-rate strategist at UBS AG. “But the medium- and long-term costs dwarf the short-term advantage of lower yields. The cost of a break-up of the euro-region would be massive for Germany.”