Last week, we talked about how higher sovereign risk can “spill over” into the corporate markets which in turn, could curtail economic growth and upset financial stability. Bond yields continue to rise in pockets of less ECB intervention as investor require more yield for the credit risk.
According to Bloomberg, a Belgian auction drew little support which has led to higher yields. Currently, Belgian 5-Year notes are wider by 15 basis points to 2.93 while the yield on the Belgian 10-Year is higher by 8 basis points to 3.57. Comparatively, 10-Year German Bunds is trading at 2.55, a decline of 3 basis points in a flight-to-quality trade.
Belgium sold a total 3.2 billion euros of bonds due in 2012, 2016 and 2020. Investors bid for 3.12 times the amount of the 2-year notes on offer, according to the Belgian Debt Agency. The so-called bid-to-cover ratio for the 10-year bond was 1.40. That’s lower than the 1.80 cover at the previous auction of the security on Feb. 22.
“It was a pretty difficult auction,” said Huw Worthington, a fixed-income strategist at Barclays Capital in London. “The bonds underperformed going into the supply and underperformed afterwards. It wasn’t a particularly good supply event.”
Investors demanded an extra 103 basis points, or 1.03 percentage point, in yield to hold Belgian 10-year securities instead of bunds, up from 49 basis points a week ago. That’s the widest spread since March 2009.
Germany also experienced difficulty in a bond auction in late May that drew a low 1.1 bid-to-cover ratio. The Bundesbank stepped in and purchased close to a quarter of the bonds for sale in order to prevent a failed auction.