Posted on 01/07/2009 10:38:01 PM PST by bruinbirdman
A German sovereign bond auction failed on Wednesday as investors shunned one of the most liquid and safe assets in the world in a warning for governments seeking to raise record amounts of debt to stimulate slowing economies.
The fate of the first eurozone bond auction of 2009 signals trouble ahead as governments around the world hope to issue an estimated $3,000bn in debt this year, three times more than in 2008.
The 10-year bonds failed to attract enough bids to reach the €6bn the German government wanted. Bids of €5.24bn, a cover of only 87 per cent, amounted to the second worst auction on record in terms of demand.
Such developments were rare before the credit crisis. Before the seven German bond auctions that failed last year, the last German bond auction to fail was in July 2000 after the dotcom crash.
Analysts said the vast amount of supply is deterring investors and a growing number of countries, including those with deep and mature bond markets, such as Germany, the UK and Italy, are struggling to attract buyers.
The Netherlands has seen bond auctions fail, the UK and Italy have been forced to offer investors higher yields to meet their auction targets, while Spain and Belgium have cancelled offerings because of a lack of demand.
The German finance agency admitted that investor appetite for government debt had waned, although insisted the auction was “not a disappointment”.
Meyrick Chapman, a UBS fixed-income strategist, said when a German bond auction failed it “does suggest there may be trouble ahead for other governments wanting to raise money in the debt markets. Before the financial crisis, German bond auctions just did not fail.”
However, analysts stress the heavy supply is being offset by fears of deflation and recession, which are typically supportive to government bonds and have depressed yields, which have an inverse relationship with price, to historical lows.
The UK on Wednesday successfully sold £2bn in gilts due to mature in 2038. But Robert Stheeman, chief executive of the UK Debt Management Office, has warned that the large supply of debt could deter buyers of gilts. Britain is planning to raise £146.4bn in bonds this financial year – three times more than last year.
Now one would think that if the author wanted this to make the most sense possible he would mention the interest rate at which this bond was to be floated.
"Meyrick Chapman, a UBS fixed-income strategist, said when a German bond auction failed it “does suggest there may be trouble ahead for other governments wanting to raise money in the debt markets. Before the financial crisis, German bond auctions just did not fail.” "
yitbos
The interest rate is the most important part of a bond.
But to set that rate successfully, you have to have enough bidders for the whole issue. If you’re left with more paper than you have bidders, then you have two choices:
1. Accept all bidders, including those who are bidding low (ie, low to face value, ie, wanting a higher rate)
or
2. The sovereign bank or treasury takes a big part of the issue onto their book.
Germany chose door #2 today; the Bundesbank retained something like 32% of the issue.
The yield on the paper they sold was about 3.19%.
yitbos
Yes. It is a very big deal. When you have a failure in an auction like this, where the perception has been that the paper is ultra-safe (and that has been the assumption given to German sovereign paper), it makes bond markets prick up their ears and say: “Uh... why?”
NB that the US sold $30 billion of 3-year paper today. We had 2.2 times as many bids as we had paper. We had no trouble attracting bidders. The UK sold paper today, and they had 1.7 times as many bids as they had supply. So they had no trouble selling debt.
Of all three, I’d be most skeptical of the UK, not Germany.
So why are bidders holding back from the German auction? Dunno yet. I’m sure we’ll learn the reason in the fullness of time...
That Germany was offering by percentage such a large amount more, and didn't get it...errr.
I wonder what this has to do with all this stress, world wide, and the Euro.
Are people getting suspicious of the Euro? If the Euro fails, what do you get paid back in and at what rate?
Give me a ping when ya do - Thanks
Do you mean the Coupon was 3.19%? If that is the actual yield then this is not the catastrope portrayed. Raising the coupon sufficient to attain full subscription would not be that costly.
The increased value of the Euro works against the German bond since it costs more of the foreign currency to buy the issue. This could be reflected in a lower demand from the international money world.
That’s what the Germans reported. What they didn’t say was whether this was before or after the Bundesbank stepped in to buy back the paper without a bid. I’m guessing the latter.
The short end of the US Treasury curve is low because a lot of big money funds, banks and others have been buying the short end of the curve because they reckon it is the safest, most liquid instrument where they can expect to get their money back when they want it.
The Fed has also been buying some US treasuries and agency paper to artificially lower interest rates along the curve.
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