Revisiting Today's "Failed" Bund Auction: Less Than Meets The Eye

Tyler Durden's picture

In the aftermath of today's so-called failed 10 Year Bund auction, the number of explanations seeking to goal seek some preconceived theory as to what happened has soared with justifications ranging from the amusing to the bizarre to the outright ridiculous. Here is the bottom line: "failed" Bund auctions, in which the Buba (Bundesbank or the German monetary authority) steps in to "retain" an unbid for amount and hit a maximum issuance happen all the time. In fact literally all the time as the inset chart shows. Such is the Buba charter - some European countries fail to issue the maximum amount (such as Spain and Italy in the past week), others see the central banks filling the demand. This has nothing to do with implicit or explicit monetization (because if it did then every Primary Dealer takedown in a US Treasury auction would also constitute monetization), or with some opaque negative repo prevention scheme (incidentally negative repo rate in the US bond market happen all the time - see here for instances in just the last week). It has everything to do with lack of demand at a given price. Nothing more, nothing less. And while it is intriguing to fabricate complex theories about broken secondary conduits or what have you, the explanation is far simpler. As SocGen puts it: "The fact that the Buba was forced to retain the biggest share of the sale in recent memory (see chart) is clearly a sign that some investors are no longer showing up or have started to buy considerably less, preferring other fixed income or alternative safe havens." No need to conceive an explanation where simply supply and demand will suffice. And in this case there was not enough demand at prevailing yields. And that in itself is the most ominous explanation because as SocGen concludes, "certain investors are starting to overlook the eurozone altogether". Lastly, for those who look at things only from a theoretical standpoint and forget there is an actual market, the direct implication is that Euro Country X spreads to Bunds just collapsed. And presto - with one "failed auction, European periphery, and that now includes France, Balgium and Austria, all suddenly look much better. Never waste a crisis...

Full note from SocGen:

German ‘safe haven’ status under review?


There were reports last week that investors in Asia were starting to reassess their exposure to the core eurozone debt markets after already having pulled their horns in on the periphery. Though such stories can be difficult to verify, the results of recent eurozone bond auctions clearly show that confidence has started to flag, even in German Bunds.



The EUR6bn, 10y sale drew bids of just 1.07 times the amount on offer if the Bundesbank’s part of EUR2.356bn is left out. This participation rate is among the lowest since the inception of the EUR in 1999 (see chart above). The fact that the Buba was forced to retain the biggest share of the sale in recent memory (see inset chart) is clearly a sign that some investors are no longer showing up or have started to buy considerably less, preferring other fixed income or alternative safe havens.


Auctions can be subject to technical considerations that include hedging of existing exposure or the execution of relative strategy ideas;  however, the statistics that accompany this morning’s 10y Bund auction do not make for pretty reading and are a reason for concern as certain investors are starting to overlook the eurozone altogether.


The argument that yields have fallen too low does not stack up if one considers the levels of 10y gilts and USTs. The gilt/Bund spread  collapsed to below 10bp today from 50bp a few weeks ago. The UST/bund spread plummeted to -16bp. EU 10y swaps spreads are down 10bp at 58bp after being down to 51bp earlier.


The political rhetoric from the EU leaders as well as uncertainty attributable to Treaty changes and dangers from rising contingent liabilities  for the AAA nations have obviously been detrimental to investor confidence both in the eurozone and overseas.


Insofar as the contagion has recently spread from the periphery to the core, auctions like the one this morning could cause fear to escalate  that, after France, markets are also starting to doubt the position of Germany as funding pressures continue to mount. With the  EU summit only two weeks away, this should be a reminder to EU leaders and policymakers that political transition and austerity alone will not stop the cost of the sovereign debt crisis from escalating until a firewall is put into place.

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SDRII's picture

With Ireland down they need to step up the Caribbean banking center and "uk" unrelenting bid

He_Who Carried The Sun's picture

Who wants to make less than 2% on a ten-year in this volatile and insecure environment? They should have tried 2 or 2.01% and everything would have been just fine. Bureaucrats+Finance=Zilch!


sqz's picture

Or, if you're Buba, you can just try your luck for sub-2.0%, lowest in history of Bundesbank, for the final auction of the year and laugh as the market buys up 60% of your paper... Frohe Festtage!

Then watch as the ECB cuts rates and you get to fleece the market all over again in the new year... Frohes Neues Jahr!

Long-John-Silver's picture

If you are Jon Corzine with $1.5 billion dollars of stolen MF Global client funds even 1% nets a sweet profit. If he losses it all it's no skin off his back.

chubbar's picture

I get your point Long John but the bigger question is who the fuck are these guys taking down multi billion dollar bonds week after week? I really can't conceive of that kind of wealth. The primary dealers take down a bunch and resell them to the feds for a profit. There are institutions taking down bonds on a regular basis from investment/401k funds. BUT, who the fuck is big enough to be a registered buyer of billions in bonds from these auctions?

topcallingtroll's picture

I think the tylers addressed that at one point.

The ECB is loaning banks money and this is used to buy the bonds.

Real private demand at these yields might only cover ten percent.

luckylogger's picture

It is suppossed to be safe ...............

paarsons's picture

I'm dying to see Europe shit the bed and deflation reign over the globe.

But i know it won't happen.

They'll start printing money for the time being.


Mr Lennon Hendrix's picture

They have been printing.  That is what they do.  They print more and more and more.  Everyday they print.  The printers don't stop. 

Massive deflation plus massive inflation, equals what?  It is like a monetary Frankenstein.  In the end, it will be proven that fiat is not worth the paper it is printed on.

Caviar Emptor's picture

Massive deflation plus massive inflation, equals what? is like a monetary Frankenstein.

Exactly! Mr Lennon, you've seen it too! 

I call it Biflation. It's both deflation in the real economy (from such sources as debt-deflation, over-capacity and fiscal austerity) and inflation in the paper economy (constant money printing, debt monetization, huge global dollar reserves and resources peaking out). 

The scariest part? The money printing accelerates the vicious cycle that accentuates both. Both can get worse simultaneously. And central bank bellweather calculations are flawed and won't detect it. If your right hand is in a pot of boiling water, and your left in a pot of ice water, does that mean everything is fine because the central measurement is normal? 

Mr Lennon Hendrix's picture

Nope.  It means you lose both your hands and now you will definately need a girlfriend, or at least insurance that pays off loss of limb.

AmCockerSpaniel's picture

Wait till we get "US Covered bond Act of 2011". If congress passes this it's game end!

covert's picture

there is a lot of hidden corruption here.


Mr. Fix's picture

An invester would need one heck of an iron clad guarantee to put any money into the euro zone these days. It is those iron clad guarantees that have vanished, and the investors have noticed. It won't take long for a collapse to come now.


Oh, and before I forget, happy Thanksgiving to everyone, we all have much to be thankful for.

DeadFred's picture

The money has to go somewhere. Three billion put into FDIC insured accounts is tens of thousands of accounts. There isn't enough gold above ground to soak up the money that wants to find some safe place to hide. There is literally no place for it to hide. We need to keep this in mind when we think the stock market will keep going down. There is a boat load of money out there that has to be somewhere.

Terminus C's picture

Unless you are short term trading these, I cannot comprehend why anyone would buy this shit (shit = any sovereign bond).

I think I need to buy a gun's picture

They stack the pension funds with that shit

youngman's picture

Well they better buy their own shit...they created it....

hedgeless_horseman's picture



How does one say Quantitative Easing in European?  The European Central bankers are writing their letters to Father Christmas.

hedgeless_horseman's picture



Here you go, Angela.

...Quantitative Easing in European...















Irrational Exuberance's picture

The would be bond buyers are waiting for the germans to mint/coin up the gold that the bundesbank just sold.  It's a much safer place to park money than bonds that will be paid in Euros rather than the likely upcoming Deutch Marks!

Lord Welligton's picture

"certain investors are starting to overlook the Eurozone altogether"

And they would be entirely correct.

Why would anybody put fresh money into any of the Eurozone Nations?

It's just a "Zone".

What the fuck is a "Zone"?

blunderdog's picture

the trope goes: "The dollar is an I O U Nothin!, and the Euro is a WHO? O's U Nothin'!"

Manthong's picture

 "What the fuck is a "Zone"? "

Uh, here I think the Eurogenous Zone is Merkels G-Spot.

slewie the pi-rat's picture

slewie wants a Buba bankster bobblehead doll for Xmas

please can i have one?  please?


SunBlaster's picture

"not enough demand at prevailing yields"

So why not increase the rate than? Aren't they interested in selling all the bonds? Guess if ECB drops rate to 0.50%, then bunds will look better.

Imminent Crucible's picture

Why not increase the rate? That's the part the story left out; the rate did increase, to 2.06%. In the secondary market, 10YR bunds went up 20 bp to 2.08%.

A lot of traders are not so blasé as this writer: some called it "awful" and "abject panic":


Mike2756's picture

Are they pricing in a bank recap? It also has to be a trust issue, not much truth coming out of any of the EU countries.

fonzanoon's picture

How long do we have here? The ratings agencies ignored the stupid committee. Now these ass clowns have at least a year to squabble over bullshit cuts. How long before we are where they are?

Tic tock's picture

is the same sort of thing possible in japanese bonds?

roguetraderinchicago's picture

The best part is the US still does not think this will ever happen here...tisk, tisk!

oogs66's picture

Maybe investors are buying cheap German via EIB or KFW or EBRD or EFSF or WestLB ?

Mark123's picture

Interesting...Europe (Germany) is trying to do the right thing by protecting the value of the currency (or at least more so than the rest of the world).  USA, UK et al are scrambling to debase their currencies and monetize debt of governments and large banks.


I really have a hard time understanding why the USA model is seen as so superior, other than the dollar it is used as a reserve currency.  These are strange times where so much does not make sense....

bob_dabolina's picture

Why do you think having the worlds reserve currency is important?

If you can answer that question you will have your answer.

It's not a perfect system but at this current moment in time it's the best of the worst.

Ned Zeppelin's picture

This article makes zero sense. 

Tyler Durden's picture

Let's try in simpler terms then:

No demand. Nothing more. Nothing less.


topcallingtroll's picture

Insufficient demand for the selling price. Which is more than meets the eye if you think about it.

Tyler Durden's picture

Fairly confident that only those in remedial Cramer class needed that clarification especially since the article said, "And in this case there was not enough demand at prevailing yields." For those confused, with a bond, price and yield are inversely interchangeable.

Of course, even that is only relevant only so long as the medium of exchange still has any faith and credit, especially when the instrument transacted in is the one imparting said faith and credit.

slewie the pi-rat's picture

yo, t_c_t!

fill tyler's glass, wouldya please?

GoldBricker's picture

Hi TD. Thanks for a great site. Regarding the auction, I can accept the market explanation.

My question is: Why, then, the overwrought headlines proclaiming it as a 'disaster'? Is this an effort by Germany to bolster its case against further bailouts? Was the low rate on offer designed as an intentional fail, to make it look as if Germany's credit is weakening along with everyone else's? Are the PIIGS now on notice (we really mean it this time) that if something can't go on forever, it will stop? Perception management is everything in a confidence game.

Your site is about looking beyond the headlines to the substance. I'm trying to look beyond the substance to the what the headline would be if we had real reporting (present company excepted, natch).

Ned Zeppelin's picture

Understood, my master. I will resist next time my feeble mind fails to understand such simple truths, clothed as they were in SocGen's blather. 



topcallingtroll's picture

Actually there is some money printing here.

It is well hidden, and the explanation is long.

Where does buba get the money to buy the excess bonds?
Is it loaned to them from the ECB?

Bunds are priced above the market clearing price if buba had to take 39 percent of them. One hundred percent could have been sold privately at a given price. Lets call it Pm ( market price of bonds if auctioned freely to the public).

If Pb is the price the buba is willing to pay and Pb is greater than the price the bonds would have sold for if the price were lowered so that 100 percent sold privately (Pm) then

Pb minus Pm equals free money that appeared by magic.

Yes buba has a corresponding liability to the ECB so it is technically sterlized, but if none of these transactions are ever reversed and all loans are rolled over and new loans provided for buba to step in again when necessary then this free money always stays in circulation.

It looks to me like another form of "bezzle" except this bezzle is never discovered because the accounts are never settled but permanently rolled over and increased.

rambler6421's picture

Wait when the U.S. bond market has a failed auction.

PaperBugsBurn's picture

Failed as in your country is an oligarch's nightmare. A true Frankenstein.

Reserve currency. What a sick joke. It's only Rotscum's &Co that made that possible so we could arrive at this nightmarish moment in time with a trillion dollar death and destruction budget in the name of thievery...oops I meant "Imperialism".

And what did it get most Americans? Poverty, the last time I checked.

I can't wait for 2012. War, collapse, hyperinflation.... BRING IT, bitches!