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Failed Bund Auction Having Spillover Effects On Europe
Eariler today there was an auction of €3 billion 30 Year Bunds that failed to attract enough demand to cover the offer: only €2.752 billion in bids were collected, with just €2.458 was sold. This is the first failed bond auction in Germany in over a year. This puts into question the entire premise of entities like PIMCO who believe that German bonds are the go-to flight to safety. Of course, this could be a temporary blip in light of the uncertainty of how Germany will handle Greece now that German opposition has said it would not bail out the troubled PIIG - in many ways this in itself is a game changer for the EMU, or just an artifact of the maturity of the 30 Year: presumably the "flight to safety" sweetspot is focused in the 3-7 year range. On the other hand, peripheral weakness should have generated incremental demand for Bunds if conventional wisdom is correct. What is certain is that auction weakness was instrumental in facilitating weakness at countries like Portugal, and Greece. Although the latter certainly does not need the help.
From the WSJ:
Germany's €3 billion ($4.03 billion) offer of its 30-year bund was undersubscribed at an auction Wednesday, something analysts traced to a possible combination of pricing terms, European debt jitters and heavy market supply.
The German government sold €2.458 billion of the 4.75% July 2040-dated bund at an average yield of 3.83%. Its €3 billion offer, however, attracted only €2.752 billion in bids.
The German debt agency played down the failure to get a full allotment, the first for any German government bond for more than a year. "Underbidding happens once in a while—we don't have a problem with it," Joerg Mueller, a spokesman at the agency, said. Mr. Mueller dismissed some speculation in the markets that higher inflation expectations may have generated disappointment in the yield on offer.
Some analysts also suggested Germany's future participation in any Greek bailout poses a risk to German borrowing requirements. "The aid mechanism for Greece is a potential risk for German paper as Germany will be regarded as one of the main countries [involved in the bailout]," said Ioannis Sokos, strategist at BNP Paribas in London. "However, we are still not there, as there is a lot of uncertainty with respect to the implementation of the plan," he added.
"Today's results clearly illustrate that 30-year bonds are too long to benefit from flight-to-safety flows," said Jan von Gerich, senior analyst at Nordea Ban in Helsinki. "One should not read today's auction as meaning that the demand for German bonds would be waning more generally," he said.
A more sinister explanation could be that traditional primary market participants, such as Goldman, are punishing the country for its escalation in the Goldman Sachs affair. Nothing like a little bond scare to get things back to normal for GS.
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I'm betting on the more sinister explanation.
Me too. Punishment for German intransigence, but not for the Goldman thing, for their unwillingness to play nice and go along with the Greek bailout.
Doesn't that play into the hands of those who don't want to bail out Greece? Those funds would be needed at home.
Goldman pounding Germany for their Goldman stance makes more sense. Greece is fading into obscurity. A couple of weeks from now the Greeks will wonder where everbody went... Showtime is over.
The message reads "Do not even think of bailing out Greece"
A failed sovereign debt auction? Is Bernanke on vacation at the moment?
The only asset class you can truly rely on is the one between your ears.
Mine is a liability, not an asset. I'll have to fall back on being really, really, ridiculously good looking.
You sure you not Derrick Zoolander?
He was my inspiration. He made me want to be a model.
Or for women, what's between your legs
Trolling through the cougarlife personals makes me think manwhoring my asset might be profitable.
You keep your wallet between your legs?
Why buy a 30 year Bund in Euros if the Euro will not be around that long?
+1
And, the poor guys need a Fed to do all their buying, like we do here in the US. ;-)
Because the ink never dries
Spot on. If they were selling them in DM's they would have been eaten up like hotcakes.
See what happens when you aren't able to print the money and take it to your country's debt auctions?
You have to get Trichet to print it for you?
So, this is how many? 7 failed bond auctions in the last 2 years?
These guys are supposed to be the saviors of the EU?
Jan von Gerich, senior analyst at Nordea Ban in Helsinki: "One should not read today's auction as meaning that the demand for German bonds would be waning more generally,"
Yeah, we sure wouldn't want to misunderstand what a failed auction is, because it is normally pretty bad. Good thing Jan set us straight.
Funny thing... the long bond doing just fine today.
Why would anyone loan the money to Germany when they may pass it on to Greece?
Bond wars!
Iam sure this will have a salubrious effect on next weeks Treasury auctions? No?
Watch for Gilt failures en masse.
OK. I'll bite. Why? You mentioned this yesterday (maybe you're testing to see if anyone is paying attention.)
I think they are the real canary in the coal mine with the election coming up. A hung parliament would create uncertainty and put upward pressure on yields. Of course, this is not new news: http://www.telegraph.co.uk/finance/economics/6693162/Morgan-Stanley-fears-UK-sovereign-debt-crisis-in-2010.html
There have been small cracks surfacing here and there, but a recent post on ZH caught my attention, where it was reported that the recent "foreign" treasury demand since January has come from England, not China. I know many people think UK treasury purchases are just a proxy for backdoor Chinese purchases, but IMO the latest round of buying is coming from BofE proxies in London. This leads me to believe we are closer to the endgame than people realize as the US-UK financial oligarchy has run out of people to steal from, and now are left to buy from each other in a not so subtle shell game. So, I think the UK debt market is a powder keg ready to go off, and the election will likely serve as the catalyst. US has similar debt problems of course, but US elections are 6-7 months away.
Very good points, all.
And also remember the half-trillion dollars in FX swaps that Dr. Ben shot over to Europe in March of 2009. It could be that the B of E is repatriating said money through the use of Treasury auctions. They could be the mysterious bidders in the auctions, redeeming our own dollars back to us now that the storm has passed. (Or so they think...)
Basically you have the UK buying US debt with dollars that they have in the hole from the swaps. Either way you draw this out to any logical end, it doesn't look especially good for the pound.
I say get very short ahead of the UK GDP posting on Friday. It could be a couple hundred pip move to the downside. Keep your stops close, though, because they can massage numbers as well as anyone else.
Orly/John Connor, very impressive stuff. Never would have crossed my mind.
Agreed.
delete
I agree with you, theyhave ran out of people to rob and people don't want to play in their game anymore. We are close to the last dregs of gas in our economic machine. That is why they are trying to buy time any time in order to find a solution to the problem. But eventually like all things that are pushed off till tomorrow, you must take the medicine you have been saying no too for years.
Something is definitely going to happen with the Pound Sterling. I think the timing her will be a little precarious as the major currencies make their rounds through strength and weakness- all to cover the arse of the cable.
When the Gilts start to fail and GDP plunges, look out below. UK GDP report comes out @ 0830 GMT on Friday. If it doesn't come in "better than expected," then the whole kit-and-kaboodle could tilt to the downside.
Stay short Euros and GBP, take the drawdown and be patient. I have a distinct feeling it could be worth it.
:D
Very good stuff...thanks. What, in your opinion, will be the splash effect on the US markets after Friday's announcement?
If you're referring to the UK GDP release, then the downside in the European markets could set a cascade that will reverberate to the US markets as well.
The way I see it playing out is that volumes will be very heavy on the FTSE and the DAX until mid-day, taking losses of ~2.2%. In the afternoon, the boys are awakened at the FRBNY and they commence to buying SP futures to support the market. Maybe some "good news" comes out of Greece/Germany and by the opening of the NY session, the losses have curtailed back to 1.1% or so.
By the end of the NY session, the SPX finishes basically flat on the day.
As far as currencies go, look for an immediate 60-pip sell-off of the GPB/USD pair with a continuing decline into the afternoon with a total of ~120-pips in losses. Support returns at the opening of the NY session and the GBP finishes down 98-pips on the day.
Of course, these are not "predictions" but a simple scenario that could very well play out in these markets.
Thanks. We'll surely see soon enough.
Short term I completely agree. Medium term I think the dollar will weigh heavy on the US this summer.
Come over to USTs...we NEVER have a failed auction!
In fact, we have record demand despite record supply. It's amazing, in fact, just how strong we are.
Dumb question, Bloomberg is showing Bunds on the close: the 10 year at 3.08 and the 30 at 3.84%. I don't follow the 30 yr Bund but the 10 yr is priced rich. So how can that be with a failed auction?
I forgot the explanation, but I asked the same thing on alphaville a long time ago when there was a failed gilt auction and everyone freaked out (we had two failed bund auctions before and nobody cared, but the failed gilt auction was the most read article on bloomberg). Somehow, it's not too unusual for bund auctions to fail because the way the bund auctions are realized is different to gilt and treasury auctions. I'm sorry that I don't have more information, but I think that it's important to know that failed bund auctions are not the same as failed gilt and treasury auctions
I am pretty sure that here and in the UK, Primary Dealers are required to bid on bonds. Perhaps in Deutschland, they are not.
I would love to be corrected on this idea.
:D
no, there was a real explanation why a bund failure is no big deal (this is not the first failed auction, there have been several failed bund auctions) and everyone freaked out on that failed gilt auction.
Right but what I meant was that the bid-to-cover in UST auctions is automatically 1:1 because of the PD requirements.
If the gilts failed, it was because even the PDs weren't buying. That would be a ginormous deal if it happened in the US, too.
The question is how long until the "unexpected" nation has a bond sale failure or financial issues. I still would wager on Austria but there are other wildcards out there...
Chauncey Gardner adding just enough Miracle Grow, water and dung makes all the flowers bloom in the spring!
Game over for nasdaq100..
http://midasfinancialmarkets.blogspot.com/2010/04/nasdaq100-2035-great-w...
Potentially dumb question as well - how does a bond auction that yields under coupon fail?
Money in stocks is worth much more than 3,83% unless stocks fall, but then we have D-Day for Ponzi and nothing holds significance anymore.
Another reason might be that 30 years is a long long time and who knows whether we already reached peak ink.
Finally, a $-investor would trade his $ against € and we all know what happens if you sell B- to buy B-
MARKET UPDATES :
http://www.zerohedge.com/forum/latest-market-outlook-0
How is it that Germany can't auction off a few billion in Bunds and we Americans can auction off a hundred billion per month? Something smells foul.
Really, I don't believe anything coming out of Washington, the Fed, Wall Street, etc. It's all a scam. But that's me.