In an ominous sign of the malignancy of Europe’s financial contagion, Germany held a bond auction Wednesday to which few buyers showed up. Commercial banks bought just 3.64 billion euros of the 6 billion euro auction, forcing the Bundesbank to retain 39% of the debt, a rate of retention Germany’s central bank has not seen in over 12 years.
Throughout Europe’s financial crisis, Germany was seen—initially along with France—as the center of European financial strength and the source of funding for the Eurozone’s debt-hobbled periphery. But France’s standing in that core weakened considerably this summer when bank stress tests revealed French banks to be the most exposed to toxic sovereign debt, and this week Moody’s spooked markets by warning France is in danger of losing its triple-A credit rating.
Germany’s poor auction results Wednesday may signal that the feared bond vigilantes no longer see Germany as invulnerable to contagion or as having the capacity to shoulder the funding burdens of the rest of the eurozone.
The spurned bunds yielded just 2%—a low rate but one the market had assigned Germany based on a perception of the soundness of its economy. If today’s poor auction results are indicative of a trend, Germany may be losing its reputation as a safe haven, a status still enjoyed by the U.S. and U.K., whose 10-year bonds and gilts currently yield 1.93% and 2.14%, respectively.
With the infection of Europe’s core now a distinct possibility, all eyes are turning to the European Central Bank to see if it will intervene in markets through massive bond purchases as the Federal Reserve has done in the U.S. and the ECB—more tentatively—has done through its purchases of Italian and Spanish bonds as well as peripheral nations’ debt. The world’s central banks have been fighting a guerilla war with bond vigilantes over the yields of shaky sovereigns. Today was a win for the vigilantes and Germany appears to have been demoted to “shaky.”