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German 10 Year Bond Auction Suffers Technical Failure

Tyler Durden's picture




 

This morning, Germany attempted to sell €5 billion in 1.5% 10 Year bonds. It sold just €3.61 billion directly to investors (who had submitted a less than auction clearing €3.91 billion in bids), forcing the German Treasury to retain 27.8% of the auction, €1.39 billion: the highest retained amount since November 2011 when it was 39%. For one reason or another: the yield was too low at 1.42% (compared to the 1.634 average), there was much more supply elsewhere, fears of what the ECB will do tomorrow, or who knows - the real bid to cover was a paltry 0.79 (all in BTC 1.09 including government retention) compared to 1.57 at the last auction and a 1.31 average at the past 4 auctions. In other words the auction was for all technical reasons, a failure, and only the second such "failure" of 2012. The immediate reaction was Bund futures down 22 ticks at 143.28 vs 143.70 before auction as the market digested the surprising disappointment, with the German 10-year government bond yield up 2.4 basis points at 1.41 percent vs 1.37 percent before auction. In summary, if the Germans needed any more reasons that funding the insolvent Eurozone at all costs up to an including debt monetizations, which may result in failed bond auctions for German itself, are not in their best interest, they just got one. The good news: in an email sent out immediately by the German Finance agency, the bond sale was "not a risk to the budget." Wouldn't want a failed bond auction to jeopardize the budget now.

From Reuters:

"The figures once again show that the market environment is very volatile and is holding back on purchases given upcoming decisions," the German finance agency said, referring to a pending interest rate decision from the ECB due on Thursday.

 

Financial markets have broadly priced in a 25 basis point cut in the ECB's key interest rates to a record low 0.5 percent on Thursday to stimulate growth and as part of its efforts to lower peripheral bond yields. Economists polled by Reuters expect a cut either on Thursday or in October.

 

Demand was also affected by heavy supply elsewhere in the euro zone. The Netherlands is selling a three-year dollar-denominated bond on Wednesday while triple-A rated Austria also sold bonds on Tuesday.

 

Only one other German auction has failed to draw bids to cover the amount on offer this year - that was the launch of the previous 10-year benchmark, the July 2022 bond, in April.

Analyst kneejerk response:

RICHARD MCGUIRE, STRATEGIST, RABOBANK, LONDON

"Soft auction out of Germany with the new 10-year technically uncovered...This stands in contrast to favourable auctions out of Austria and Belgium earlier this week although some degree of market indigestion in the wake of this supply might have proven a factor.

"Going forward, today's disappointing Bund result does not presage Germany encountering difficulty in funding itself but rather underlines the fact that, as long as the market continues to travel in hope as regards an eventual crisis solution, the cost of such funding is likely to rise with the curve operating with a bear steepening bias as a result."

ALESSANDRO GIANSANTI, RATE STRATEGIST, ING, AMSTERDAM

"It's very weak. The retention rate was the highest since November last year. The fact that the German auction is coming one day before the ECB meeting probably made investors refrain from participating. Investors are very sensitive to the ECB meeting tomorrow as the odds are that (ECB President Mario) Draghi can come out with measures that are friendly for peripheral markets and that will trigger a sell-off in Germany.

"The level of yields is really low too and ...those are the factors that have triggered a soft auction today but it's not dramatic and not the first time that has happened this year."

ANNALISA PIAZZA, MARKET ECONOMIST, NEWEDGE STRATEGY, LONDON

"Today's auction was very disappointing. Although the paper was fairly priced versus previous rolls, market dealers might have been cautious as the paper will be tapped again in three weeks, with some potential cheapening in the near term.

"Uncertainties surrounding the ECB press conference tomorrow might also explain some of the weak demand as markets might see risks of further spread tightening (versus the periphery), should Draghi comments reinforce the idea that the ECB and EU leaders are ready to do whatever is needed to save the Euro."

PETER CHATWELL, RATE STRATEGIST, CREDIT AGRICOLE, LONDON

"A weak Bund auction, with less bids than the 5 billion targeted amount. The weak auction is in contrast to price action in the roll ahead of the auction, which tightened by around a quarter of a basis point this morning, and probably reflects the sheer volume of competing 10-year core supply both last week and this week, and of course the ECB event risk. The 10-year cash yield is now above the 100-day moving average, so some of the post-auction reaction may be exacerbated by technical selling."

 

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Wed, 09/05/2012 - 06:54 | 2763734 PaperBear
PaperBear's picture

Is the bond market giving it’s response to Merkel saying ‘bailouts here to stay’ ?

Wed, 09/05/2012 - 07:38 | 2763812 Terp
Terp's picture

No this is GS saying "Do as we say or we won´t roll your debt"

Wed, 09/05/2012 - 07:58 | 2763864 pasco35
Wed, 09/05/2012 - 16:54 | 2765784 bank guy in Brussels
bank guy in Brussels's picture

Tyler Durden's tweet about this article, with Tyler's bare body pic, was published and linked in today's UK Telegraph, in their excellent 'Debt crisis: as it happened' daily live blog series by the Telegraph's Rachel Cooper:

« ... A 10-year government bond failed to attract bids worth the amount offered at auction today - it is only the second such failure this year. ... This is how zerohedge reported the sale ... »

http://www.telegraph.co.uk/finance/debt-crisis-live/9521686/Debt-crisis-...

 

Wed, 09/05/2012 - 06:55 | 2763736 Michelle
Michelle's picture

Hmmm, now HOW DID THIS HAPPEN? These failures aren't supposed to happen in a centrally planned global economy? Somebody forget to come back from holiday?

Wed, 09/05/2012 - 07:14 | 2763754 Ghordius
Ghordius's picture

obviously the eurozone is not enough "centrally planned". and this failed Bond auction is the clear sign that Germany is in great, great trouble. Not as many investors as expected willing to pay the Germans to take care of their money for ten years at a rate below the ECB inflation target - Germany is doomed, doomed!! Man the bunkers, fire up the Tiger tanks.../s

Wed, 09/05/2012 - 07:48 | 2763840 Raynja
Raynja's picture

this could be a major tell of which way the decisions will fall over the next few days in euroloand

Wed, 09/05/2012 - 06:56 | 2763737 john milton
john milton's picture

maybe they need sell war bonds...

Government to calculate war reparations

Greece’s Finance Ministry will calculate the country’s claim for World War II reparations against Germany, Deputy Finance Minister Christos Staikouras said on Tuesday.

http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_04/09/2012_459735

Wed, 09/05/2012 - 09:22 | 2764125 Leopold B. Scotch
Leopold B. Scotch's picture

Enough already. 

 

I hope the Iranians send the tab to Greeks for Alexander's voilence to Persia.  Maybe the Germans can press reparations to the UN for The Great's sins.

Wed, 09/05/2012 - 07:02 | 2763745 schatzi
schatzi's picture

Stocks loving it. Must be good news because it substantiates the "risk on" sentiment. Fucking absurd.

Wed, 09/05/2012 - 07:35 | 2763755 TwoShortPlanks
TwoShortPlanks's picture

Bund failure while PMs rally and investors hold-off until the German court ruling...ummm, I dunno, I must be fucking dumb or something...I give up! Why the technical?

PS. On the topic of Bonds; I hope everyone realises that when Gold eventually backs this Fiat fuck-up, the wealthiest families in the world will effectively be back-stopping (ergo, they will own) more than 50% of global assets...you Rock Apes do realise this, don't you???

Wed, 09/05/2012 - 07:16 | 2763778 Dr. Engali
Dr. Engali's picture

Why buy debt at this yield when Germany is going to be issuing a ton more debt bailing out the Piigs?

Wed, 09/05/2012 - 07:20 | 2763780 fonzannoon
fonzannoon's picture

If I was a German and knew I had to work till I was 87 to support the piigs I would at least demand a job transfer program so I could live on the coast somewhere in Italy or Spain while I worked till death. At least demand a free time share on one of the Greek Islands.

Wed, 09/05/2012 - 07:30 | 2763796 CDSMonkey
CDSMonkey's picture

1) why buy Germany without the PIIGS at 1.4% for 10 years?  that level was based on hopes of getting Deutschemarks

2) if they are going to save the PIIGS, this yield looks really bad when you can buy all the EFSF and ESM paper you want, cheaper

Wed, 09/05/2012 - 07:24 | 2763787 chump666
chump666's picture

nasty.

Wed, 09/05/2012 - 07:25 | 2763792 youngman
youngman's picture

Finally the Economic Bond Vigilante is starting to wake up.....Economics is coming back into vogue...Yes Yes Yes...Gold and Silver are going up...normal in this time...and bonds should be getting hit hard....

Wed, 09/05/2012 - 07:31 | 2763794 bdc63
bdc63's picture

It seems we now have daily reports of bank runs and/or failed treasury auctions ... you would have to be braindead to not see the writing on the wall at this point

 

Wed, 09/05/2012 - 07:43 | 2763829 asteroids
asteroids's picture

Tell me how a failed auction was a surprise. The dates for the auctions are well known as well as ECB announcements. Oh, no one thought to consider the billions upon billions that need to be refinanced? Oh, and there are more auctions coming in the near future for even greater amounts. Good luck.

Wed, 09/05/2012 - 14:40 | 2765360 madcows
madcows's picture

What would a US bond sale look like if the FED didn't purchase their share?

Germany and the rest of the eurozone just need the ECB to go Federal.

Thu, 09/06/2012 - 01:45 | 2767124 agagshoes
agagshoes's picture

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