In the latest German 10-year bund auction, there was an increase in the yield to 0.36% from 0.21% in the previous November 23 auction. This was the highest auction yield since February 2016, although market yields had been higher in the interim period.
There was a decline in the bid-to-cover ratio to 1.8 from 2.0 previously, although this was the second highest ratio over the past two years, which suggests that there was still solid demand for bunds despite an increase in concerns over rising inflation rates and increased evidence of overheating within the domestic economy.
The retention rate was 19.6% from 16.3% previously and EUR4.02bn was allotted of the EUR5.0bn issuance volume.
Firm demand for bunds and the continued support from the ECB bond-buying programme will help cap bund yields in the short term. There will, however, be a sterner test of market confidence later in the first quarter if inflation rates continue to rise and there is increased evidence of overheating within the property sector, especially as there would be increased Bundesbank opposition to ECB quantitative easing.
Bund prices edged firmer after the action with the 10-year contract above 163.00, although the market struggled to hold in positive territory for the day.