EUAs traded slightly higher on Wednesday, with early gains outweighing the drop posted after it emerged that the UK’s auction saw only just enough demand to absorb the units on offer.
The Dec-16 EUAs settled up 7 cents at €5.31, having earlier matched Friday’s six-week high of €5.35, a technical ceiling that has been repeatedly bumped up against so far this month. Turnover was moderate at 10.8 million, with just over 2 million changing hands on other vintages.
Prices fell as much as 7 cents from that peak after the fortnightly UK allowance sale’s bidding window closed at 0900 GMT, and auction platform ICE reported a clearing price of €5.24, 10 cents below the secondary spot market. That was the largest discount seen in an EUA auction in more than a year.
The sale for 3.49 million units attracted just 11 participants, who collectively entered bids equivalent to 4.15 million. That translated into bid coverage of 1.19, which was also the lowest seen since July 2013, suggesting drooping interest in the auctions.
Meanwhile, there was a slightly bullish signal from the energy complex as German clean dark spreads nudged to this highest this week as power price gains eclipsed those of carbon.
WANING YIELDS
Yields for the EUA carry trade continue to drop due to a flattening of the futures curve, which has been exacerbated by falling interest rates across Europe.
The carry trade involves buying allowances for near-term delivery, ideally spot units via auctions, and simultaneously selling them through a longer-term futures contract, locking in comparatively decent returns made possible in part by low transaction costs and minimal storage fees.
But sliding yields, traders said, are curbing bidding interest in the auctions, which have previously attracted investors from outside of the banking and energy sectors due to the carry trade’s eye-catching returns.
The annualised yields currently implied by the spot-Dec17 and spot-Dec18 plays have fallen to 0.67% and 0.77% respectively, down from their Q1-2016 peaks of 1.16% and 1.45%, according to Carbon Pulse calculations. Factor in the trade’s execution costs, and many market participants will be left with returns of near-zero.
NOT ALL AUCTIONS
However, bidding interest in the auctions hosted by German bourse EEX, which handles all other government EUA sales, remains somewhat more stable than the UK sales, with an average oversubscription rate of 2.27 so far this year.
In addition, some traders have also previously noted that the application process to participate in ICE’s auctions is more stringent than EEX, and that this is reflected in lower UK bidder numbers that have been sliding every year since 2012.
The governments’ EUA auctions have consistently sold out since three sales in Q1-2013 were cancelled for failing to attract sufficient bids.
By Ben Garside and Mike Szabo – ben@carbon-pulse.com
