Portugal Sells 12 Month Paper At Disappointing 5.281%, As Germany Holds Another Failed 5 Year Bond Auction

Tyler Durden's picture

Today's much anticipated Portuguese T-Bill auction carried some good and some not so good news. While the Bid To Cover on the €500 million 12 month paper improved from 1.8 to 2.5, the rate on the 1 year issue surpassed 5% for the first time, and came wide of analyst expectations, pricing at 5.281%, compared to 4.813% previously. Per Reuters: " That was higher than the roughly 5 percent that dealers and analysts had looked for ahead of the sale, though the rise in short-term borrowing costs was much smaller than a more than 150-basis point jump at the previous tender in November.  "There is no place to hide on the curve for Portugal anymore. Once again, the auction increases pressure to find a circuit-breaker to limit the damage, which is most likely to mean asking for aid," said David Schnautz, debt strategist at Commerzbank in London." Filipe Silva, debt manager and Banco Carregosa explains why contrary to the EUR's reaction, this is not good news: "This rate is very high and Portugal cannot keep raising its rates at this pace, 47 basis points in just two weeks." Yet despite the weak auction, Sovereign spreads tightened modestly after rumors that the ECB would announce an expansion or a new program to buy peripheral sovereign debt. Which was to be expected: the Portuguese auction was quite irrelevant compared to what happened in Germany earlier, when the country held its weakest 5 Year Bobl issuance in 6 months: in an auction of €4.13 billion in paper, the government saw a mere 1.1 Bid To Cover, the weakest since May, and forcing the government to retain 17.4%, or €0.87 billion of the auction to make it not appear that the auction was a failure.

From Reuters:

Germany encountered the worst demand for its five-year debt in over six months at a sale on Wednesday as low yields and growing concern over the cost to Berlin of future aid payments eroded appetite for its bonds.

The German government sold 4.13 billion euros of the re-opened 1.75 percent five-year Bobl note for an average yield of 1.73 percent and a bid-to-cover ratio of 1.1, the lowest achieved since May this year.

"Simply, market volatility is keeping a lot of investors on the sidelines. We've seen yields jumping back and forth from one day to another, not just periphery yields but also the core," Michael Leister, strategist at WestLB said.

"On the other hand, there seems to be growing concern out there that at the end of the day Germany has to support the whole euro system and will eventually have to pay the bill."

The German Finance Agency, the federal government's debt management office, as usual retained some of the issue for "market smoothing" purposes -- 0.87 billion euros this time.

However, with the total amount on offer at 5 billion euros, external bids did not cover all the paper for sale, a similar result to last week's Bund auction.

Contagion: meet Euro core. A few more comparably failed auctions with or without "market smoothing" gimmicks, and the market may just noticed.

And for those interested, full details of the Portuguese auction.

 Auction date:                01/12/10        17/11/10
 Maturity                        18/11/11        18/11/11
 Settlement date:           03/12/10        19/11/10
 Avg. yield (pct)                5.281           4.813
 Avg. price (pct)              95.116          95.359
 Highest yield (pct)            5.400          4.950
 Lowest yield (pct)            5.000          4.440
 Tail                                  0.119          0.137
 Total bids                         1.253 bln       1.334 bln
 Allotment                           500 mln        750 mln
 Bid-to-cover ratio             2.5            1.8    
 Outstanding after auction  1.366 bln       866 mln

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johngaltfla's picture

Let's see...

China failed bond auction. Check.

Germany failed bond auction. Check.

Next up to bat:

California, Illinois, and New York.

Cursive's picture

So this is why the ES is up 14 pts?

johngaltfla's picture

Profit taking on dollar strength. The Bubblemedia will say otherwise but I'd be willing to bet there was major intervention in Asia overnight.

No Mas's picture

Maybe the Challenger report?  Good employment news on that front.

john_connor's picture

The music doesn't stop playing until a parliament stands up to the bs or people simply overthrow a government.  Let's see what the Irish parliament does.

Salinger's picture

for any Canadians out there this is a must watch

Carl Weinberg from High Freq Econ  on Canada's GDP


malagawatch's picture

Why should one buy bund with 1.73 % if one can get 5 % plus with a back stop of Germany?

nonclaim's picture


That will work until one realizes Germany cannot  absorb the spread for much longer.

TBT or not TBT's picture

That would be the Germany with such low birth rates it risks depopulation?   That Germany is the backstop for the PIIGS?

ElvisDog's picture

Extrapolating current birth trends forever into the future is foolish. People were predicting in the 1940's that Britain would be de-populated by the year 2000. Didn't happen. The countries with the highest birth rates in 1940 were Russia and Japan. That didn't keep going either. How many people will India have if we extrapolate their current birth rate 100 years into the future?

cxl9's picture

Once again, the auction increases pressure to find a circuit-breaker to limit the damage

1. Stop borrowing.

2. Default/restructure existing debts.

3. Live within your means.

That is all.


vxpatel's picture

"Living within your means' would literally cause an economic collapse, within days of this lideal taking place.

ElvisDog's picture

Bull-oney. Living within our means would cause an economic re-set to a more sustainable level. Is that your definition of "collapse"? Claiming that we can't possible stop piling on ever-increasing amounts of debt is evidence of successful brainwashing on your part.

CrashisOptimistic's picture

That post was correct.  Instantaneous "live within your means" is an instantaneous crush of GDP via government spending cut and tax increase.  Both those paramaters extract money from an economy.   With a destroyed GDP, that's the end of tax revenue and then further spending cuts would be required.  At some point, police are defunded, and then the gangs of 500 come to your personal house and take everything you have, including your life, and since the courts are defunded, they do it with impunity.

So what's the answer?  Who says there's an answer?

vxpatel's picture

Your theory being, Americans can control their spending habits?

Good luck with that.

bobert's picture

As Portugal goes so to the US (eventually).

snowball777's picture

Livin' mighty high on the hog, PIIglet...keep that gold safe, Portugal.

bob_dabolina's picture


time to short the euro and /es?

trav7777's picture

Germany's troubles with bonds is admission that the sophisticated players see an end to growth.

Economic activity transitioning from growth to "within means" will make GDP look like the oil price chart.  We will have to fall much further before bouncing back to the new normal

firstdivision's picture

I am waiting for out bond offerings to fail as now yeilds are reaching out for that tow line to the moon.  We are nearing 3% on 10y

gwar5's picture

Maybe Bernanke should diversify and buy some nice Portuguese bonds with higher returns.

What could go wrong?