German bond auction – demand low, yield lower

Thanks to European Central Bank's (ECB) asset purchase it's all crazy in European bond market now.

German auction of 10 year bonds today registered lower bid to cover ratio, indicating lower demand from investors, however yields dropped lower than before.

• 10 year bund were sold at 0.13%, pushing yields on 10 year to record low. Total size of issue was € 3.3 billion. Bid to cover was 1.5, down from prior 2.4.

Previous auction of similar size, yielded 0.25% in March.

Euro dropped against pairs as yields were pushed down by traders after auction results were declared.

• For now, Euro is being driven by yield differentials, which is showing no signs of ablation. Today's ECB press conference stands extremely important.
• However trends are unlikely to change should ECB keep policy outlook steady.

German bonds are now deep in negative territory.

• Yields are now negative up to 8 years and 10 year preparing to dive into the negative zone.
  
  
• Bonds up to 4 years remain out of scope of purchase, as the yield are hovering below deposit rates.

Losses will creep up, with longer holding period.

• With 10 year yield falling below zero, expected loss will go up from holding these maturities. Loss would me minimum (max -0.20), should ECB and NCBs choose to hold till maturity.
  
  
• However, more maturities turning to negative territory will mean average duration will be high for the holdings.

Euro will maintain to downside, as long as yields keep dropping to zero.