ITC German 10y Bund Auction Preview

German Auction:

16th May 2018

At 10:30 BST, Germany to auction a 10y 0.50% Feb28 Bund for €2.0bn (equivalent to ~RX 14k futs)


There is a decent concession for the Bund 10y heading into this auction, which limits the chances of a technically uncovered auction. However, the market is fairly immune to such events and no longer sees auctions as a particularly good litmus test of German Bund demand.

What might also help the auction is the outright yield of 0.62%, roughly a 3 week high. However, the 10y Bund-Tsy spread is 239bp, down 6bp from highs but hardly enticing for Bunds. If we hedge the FX risk with cross currency basis swaps this is equivalent to 3m $libor -9.5bp, which is around 6bp more expensive than the UST 10y benchmark. While slightly better levels than historical comparisons, there may not be much buying will be forthcoming from non-EUR investors.

The natural hedge going into 10Y Bund auctions is always the Bund future and it looks quite efficient at present as the spread between the CTD, Bund 0.25% Feb27 and 0.5% Feb28 is close to 3 month highs at 13.3bp.

Yield spread to the Bund contract CTD

Chart Source: Bloomberg

Just as useful is the spread to the previous benchmark, the DBR 0.5% Aug27. See chart below.

Yield spread of current to previous 10y benchmark

Chart Source: Bloomberg

Against swaps, the picture is non-descript with the asset swap spread at -40.4bp compared to its average since first issued in January at -41.7bp.
German cash flow is negative (est -€8.5bn) in the near term (this week plus 3wks ahead), with the only positive flow over the period being €0.5bn coupons 15th May.


The last 10y Bund was tapped Apr 18 with a cover ratio of 1.42x (vs. the average of 1.3x seen in the previous 3 auctions), real demand of 1.16x (vs. the average of 1.05x seen in the previous 3 auctions), tail of 0cts (vs. the average of 0.33cts seen in the previous 3 auctions) and overbidding of 0.5cts (vs. the average of 0.43ct seen in the previous 3 auctions)

Previous auction stats: