The European debt crisis appeared to escalate after a failed German government-bond auction Wednesday, indicating that investors are now demanding higher risk compensation even at the heart of the currency bloc's debt market.
German government bonds, or bunds, carry low yields but are deemed the safest haven in the euro-zone bond market. Germany has fallen short of a targeted bond sale before because of its super-low yields, but that size of the shortfall was stunning in a market already rapidly losing confidence in European Union proposals to contain the debt crisis.
A German Finance Agency spokesman said the auction reflected a nervous market but the "result doesn't mean any refinancing bottleneck for the budget."
The German government was able to sell only €3.644 billion ($4.92 billion) of the €6 billion in 10-year bunds on auction for an average yield of 1.98%. Observers said the result was the worst in recent memory for a German government-bond sale.
"The auction reflects the deep mistrust [of the] euro project rather than a mistrust to German government bonds," said Danske's chief analyst Jens Peter Sorensen. "As some investors say regarding the Euro project—if it is broke, then fix it."
The European Central Bank on Wednesday again moved to support the euro-zone government debt market with purchases of Italian and Spanish bonds as confidence wavered. Adding pressure were reports that Belgium can't pay its agreed share of the planned rescue of the Belgian-French bank Dexia S.A., which is seen as placing more risk at the door of the French treasury and adding another threat to the country's triple-A credit rating.
The failed bund auction undid much of the support the ECB might have provided as investors worried that the crisis has now spread to Germany itself.
"It is now hitting the heart of Europe," said Simon Derrick of Bank of New York Mellon in London. "Germany has spent the last 25 years building the reputation of its sovereign-bond market, and it will not accept having Greece jeopardize that. Either Greece conforms to the euro rules, or it knows where the door is." The euro was at the day's lows of near $1.3384.
The yield on the 10-year French government bond rose by 0.11 percentage point to 3.63% while the Belgian 10-year government bond yield rose by 0.08 percentage point to 5.12%.
The cost of insuring European debt against default using credit-default swaps also moved higher in early trading Wednesday, with even bonds from core countries such as Germany now costing more to insure. Italian, Spanish and French debt-insurance costs shot up to record highs.
The rising government yields come at a bad time for both France and Belgium ahead of a scheduled bond refinancing next week.
Belgium is auctioning a mixture of bonds with maturities ranging from seven to 30 years on Monday, Nov. 28, for an undisclosed amount. France is auctioning bonds with maturities of up to 15 years on Dec. 1 for an estimated combined total of around €4.5 billion.
"Belgium's precarious political situation is further fuel to the peripheral fire and, as the Belgian debt agency is due to issue long-dated paper on Monday, we expect [Belgian government bonds] to continue to bear the brunt of the selling," Peter Chatwell at Crédit Agricole said in a note to clients.
The cost of insuring bank debt against default rose to new records across the 17-country euro-zone Wednesday, as the escalation of the sovereign-debt crisis built on worries France might have to put more money into the Dexia rescue.
The five-year CDS of Crédit Agricole SA was at a record 3.51 percentage points and BNP Paribas was at 3.4 percentage points. Société Générale SA saw its CDS hit 4.08 percentage points, still off its 4.28-percentage-point record hit on Sept. 13.
Deutsche Bank AG was at a record 2.62 percentage points, which means it now costs an average of $262,000 a year to insure $10 million of debt issued by the company. The five-year CDS of UniCredit SpA widened to a record 5.98 percentage points, Intesa Sanpaolo was at 5.42 percentage points, Monte dei Paschi was at 6.13 percentage points and Banco Popolare S.C. was at 8.91 percentage points.
In Spain, Banco Santander was at a record 4.33 percentage points, while BBVA was at 4.43 percentage points. CDS are derivatives that function like a default insurance contract for debt. If a borrower defaults, sellers compensate buyers.
read more: Olympus Wealth Management
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