This page has been archived and commenting is disabled.

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.


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Wed, 11/23/2011 - 20:55 | 1908999 SDRII
SDRII's picture

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

Wed, 11/23/2011 - 21:22 | 1909073 He_Who Carried ...
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!


Wed, 11/23/2011 - 21:39 | 1909113 sqz
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!

Wed, 11/23/2011 - 22:50 | 1909259 Long-John-Silver
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.

Wed, 11/23/2011 - 23:17 | 1909314 chubbar
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?

Wed, 11/23/2011 - 23:45 | 1909370 topcallingtroll
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.

Wed, 11/23/2011 - 23:26 | 1909330 luckylogger
luckylogger's picture

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

Wed, 11/23/2011 - 21:50 | 1909135 paarsons
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.


Wed, 11/23/2011 - 22:06 | 1909172 Mr Lennon Hendrix
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.

Wed, 11/23/2011 - 22:45 | 1909234 Caviar Emptor
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? 

Wed, 11/23/2011 - 22:48 | 1909255 Mr Lennon Hendrix
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.

Wed, 11/23/2011 - 22:52 | 1909265 Long-John-Silver
Long-John-Silver's picture

LOL! Damn that's funny.

Wed, 11/23/2011 - 22:09 | 1909180 AmCockerSpaniel
AmCockerSpaniel's picture

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

Wed, 11/23/2011 - 22:54 | 1909268 covert
covert's picture

there is a lot of hidden corruption here.


Wed, 11/23/2011 - 21:02 | 1909003 Mr. Fix
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.

Wed, 11/23/2011 - 23:44 | 1909365 DeadFred
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.

Wed, 11/23/2011 - 21:00 | 1909013 Terminus C
Terminus C's picture

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

Wed, 11/23/2011 - 21:19 | 1909066 I think I need ...
I think I need to buy a gun's picture

They stack the pension funds with that shit

Thu, 11/24/2011 - 09:12 | 1910296 youngman
youngman's picture

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

Wed, 11/23/2011 - 21:01 | 1909014 hedgeless_horseman
hedgeless_horseman's picture



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

Wed, 11/23/2011 - 21:01 | 1909017 Terminus C
Terminus C's picture

"Damn the torpedoes!"

Wed, 11/23/2011 - 21:05 | 1909026 Mugatu
Mugatu's picture


Wed, 11/23/2011 - 21:19 | 1909064 hedgeless_horseman
hedgeless_horseman's picture



Here you go, Angela.

...Quantitative Easing in European...















Wed, 11/23/2011 - 21:18 | 1909065 Schmuck Raker
Schmuck Raker's picture

"Father Christmas, give us some money..."

Wed, 11/23/2011 - 21:05 | 1909021 Irrational Exub...
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!

Wed, 11/23/2011 - 21:04 | 1909024 Lord Welligton
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"?

Wed, 11/23/2011 - 21:35 | 1909104 blunderdog
blunderdog's picture

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

Thu, 11/24/2011 - 02:39 | 1909840 Manthong
Manthong's picture

 "What the fuck is a "Zone"? "

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

Wed, 11/23/2011 - 21:07 | 1909033 slewie the pi-rat
slewie the pi-rat's picture

slewie wants a Buba bankster bobblehead doll for Xmas

please can i have one?  please?


Wed, 11/23/2011 - 21:11 | 1909045 SHEEPFUKKER


Wed, 11/23/2011 - 21:17 | 1909063 SunBlaster
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.

Wed, 11/23/2011 - 23:08 | 1909292 Imminent Crucible
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":


Thu, 11/24/2011 - 09:06 | 1910282 Mike2756
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.

Wed, 11/23/2011 - 21:20 | 1909069 fonzanoon
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?

Wed, 11/23/2011 - 21:26 | 1909087 Tic tock
Tic tock's picture

is the same sort of thing possible in japanese bonds?

Wed, 11/23/2011 - 21:49 | 1909130 roguetraderinchicago
roguetraderinchicago's picture

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

Wed, 11/23/2011 - 21:52 | 1909139 oogs66
oogs66's picture

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

Wed, 11/23/2011 - 21:53 | 1909143 Mark123
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....

Wed, 11/23/2011 - 22:08 | 1909162 bob_dabolina
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.

Wed, 11/23/2011 - 21:56 | 1909145 Ned Zeppelin
Ned Zeppelin's picture

This article makes zero sense. 

Wed, 11/23/2011 - 22:18 | 1909196 Tyler Durden
Tyler Durden's picture

Let's try in simpler terms then:

No demand. Nothing more. Nothing less.


Wed, 11/23/2011 - 22:33 | 1909221 topcallingtroll
topcallingtroll's picture

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

Wed, 11/23/2011 - 22:49 | 1909257 Tyler Durden
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.

Wed, 11/23/2011 - 23:40 | 1909358 slewie the pi-rat
slewie the pi-rat's picture

yo, t_c_t!

fill tyler's glass, wouldya please?

Thu, 11/24/2011 - 03:06 | 1909893 GoldBricker
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).

Thu, 11/24/2011 - 09:12 | 1910295 Ned Zeppelin
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. 



Wed, 11/23/2011 - 22:02 | 1909158 topcallingtroll
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.

Wed, 11/23/2011 - 22:08 | 1909177 rambler6421
rambler6421's picture

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

Wed, 11/23/2011 - 22:36 | 1909223 topcallingtroll
topcallingtroll's picture

Define "failed"

Wed, 11/23/2011 - 23:24 | 1909326 PaperBugsBurn
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!

Wed, 11/23/2011 - 23:28 | 1909333 topcallingtroll
topcallingtroll's picture

Surely nobody wishes to see war and people killed.

Although riots are kinda fun to watch.

Wed, 11/23/2011 - 23:42 | 1909362 slewie the pi-rat
slewie the pi-rat's picture


let's fill your glass, too!

Wed, 11/23/2011 - 23:48 | 1909377 topcallingtroll
topcallingtroll's picture

Brownies made from THC oil for me tonight. Stuck in the middle of nowhere on a business trip.

Thu, 11/24/2011 - 00:09 | 1909437 slewie the pi-rat
slewie the pi-rat's picture

like chesterfield cigarettes:  not a cough in a carload!

put some out for people tomorrow morning!

where tf are you? canada?

Wed, 11/23/2011 - 22:39 | 1909229 bob_dabolina
bob_dabolina's picture

The FED would monetize the USTs so there would be no UST failed auction, just inflation.

Wed, 11/23/2011 - 22:56 | 1909272 Long-John-Silver
Long-John-Silver's picture

and only the nation with the worlds reserve currency can pull that off. One day very soon the reserve currency will be something other than the US Dollar.

Wed, 11/23/2011 - 23:13 | 1909303 Imminent Crucible
Imminent Crucible's picture

The U.S. Treasury can't have a failed auction in that sense, because primary dealers are required by the Fed to bid at Treasury auctions. So the U.S. version of a failed auction is a weak bid to tender, coupled with a bad tail-up.

The FRBNY will bid directly before they let yields rise much.

Thu, 11/24/2011 - 09:34 | 1910331 GoldBricker
GoldBricker's picture

Only if they're issuing the bonds in another currency (which could happen).

Wed, 11/23/2011 - 22:43 | 1909239 Caviar Emptor
Caviar Emptor's picture

 Bindung Bürgerwehr

Wed, 11/23/2011 - 22:47 | 1909249 lizzy36
lizzy36's picture

Although it is dated data this is interesting from Bloomberg:

Money managers in Japan scooped up 1.53 trillion yen ($19.9 billion) of U.K. gilts in 2011 through Sept. 30, set for the biggest annual purchase since 2008, Ministry of Finance data showed on Nov. 9 in Tokyo. Japanese investors unloaded the most debt in Germany, totaling almost 1.46 trillion yen, followed by sales in Italy and France, the figures show. From 2008 through 2010, the U.S. drew the largest amounts.

“We prefer U.K. gilts as a safe haven,” said Shinji Kunibe, Tokyo-based the chief portfolio manager for fixed income at Nissay, which manages the equivalent of $71 billion. “The flight to quality looks quite rushed. If this kind of movement continues, Germany will not be immune.”

With the financial debacle in the European continent, the U.K. tends to be a safe haven,” said Takei, who helps oversee the equivalent of $42.8 billion in assets at the unit of Japan’s third-largest publicly traded bank as measured by market value.“It first started with Greece, then into Portugal and Ireland, and now into Italy, Spain, Belgium, France and Austria. My hunch is that the final destination would be Germany,” he said on Nov. 17.

Wed, 11/23/2011 - 22:51 | 1909262 Tyler Durden
Tyler Durden's picture

What? No negative repos? No secret Buba monetization society? Just lack of demand?


Wed, 11/23/2011 - 23:24 | 1909327 topcallingtroll
topcallingtroll's picture

You know I am beginning to think you Tylers are on to something here.
It may not be secret monetization but well hidden by the complicated nature of central banking.

There is a difference between organic loan demand originating from a bank, and a central bank ordering a bank to take out loans (to buy german bonds for instance).

The latter could definitely have a Wile E coyote moment asthe people look down and realize there was only air below.

Wed, 11/23/2011 - 23:47 | 1909375 slewie the pi-rat
slewie the pi-rat's picture

wile 'QE' coyote

what's that smell?

i knew it!   the chairsatan's smoking stealth QE again!

somebody give me a light, here!   fight fire with fire!

Thu, 11/24/2011 - 06:47 | 1910153 schadenfreude
schadenfreude's picture

Interests for German Bunds is artifically low, because of the debt misery in EU. This might be a call to tell investors to go out and buy other countries (France, Italy etc.) debt. Sure, investments in Gilts is one option, but in the end diversification is important, especially in an environment, where no western developed country looks very promising.

Thu, 11/24/2011 - 00:22 | 1909486 aldousd
aldousd's picture

Less demand than supply... the 'failure to sell' to people who really want to buy them... Gee... what part of "Failed" doesn't apply here again? Someone financially explain that to me.  (I'm being sarcastic, since obviously, based on the crap in this article, someone things there is more to a sale than supply and demand.)

Thu, 11/24/2011 - 00:27 | 1909504 Breaker
Breaker's picture

This article is too complex. The failed auction means, I think, that at prevailing interest rates, there were not enough buyers. I.E. the market rate for German bonds has gone up and the government hasn't figured it out yet. Is it any more complicated than that?

Thu, 11/24/2011 - 01:18 | 1909644 slewie the pi-rat
slewie the pi-rat's picture

no, not so far as this particular market day is concerned

i think the article is trying to trace the contagion~~how this is being reflected in different countries' auctions, over time, as both the SNB and the ECB are in price-supporting supporting roles, but the economic outlook is kinda dim, not to mention the firscal combobulations, so the situ is deteriorating

the socGen quoted section ends with a call for a firewall and more fuking bankster bullshit about the next eternally-recurring EU "summit" aka clown car show where the clowns and their cars are very, very expensive

hence the firewall:  who is gonna step up and put a stop to this contagion?  about six months ago, i figured if china could get good enuf deals, it might want to.  at this point, we're relying on the galactic rangers getting a small interplanetary force involved

someone has to print the fuking money to buy the fuking debt to pay the fuking interest on the debt that's already there

this is the stage we have reached

right in front of god and everybody

the supply of do-re-mi isn't enuf to cover the needs without massive, nukuler-powered turbo-printing + afterburners + carpet bombing of fiat and debt bombs.  that's why the auction failed in  germany

see, we didn't grow out way outa the recession;  all the bullshit and lies didn't make the green shoots grow and now the unicorns are coming home to roost

Thu, 11/24/2011 - 03:20 | 1909915 rayban
rayban's picture

I disagree. Yesterday the Buba took down more than 2 bn bonds for settlement November 25th. Such a large amount cannot be justified by any sort of technicality: the German central bank wrote a check to the German Treasury value two days. It is monetization on a pretty large scale too. They are criticizing ECB secondary market purchases but they are basically doing the same, only on the primary.

Thu, 11/24/2011 - 04:47 | 1910016 Grand Supercycle
Grand Supercycle's picture

USD selling pressure continues and the prospect of an equity xmas rally and EURUSD bullish spike returns.

Thu, 11/24/2011 - 10:12 | 1910409 DonutBoy
DonutBoy's picture

When the ECB decided Berlusconi could not lead Italy in the direction they wanted - they backed out of the market and let the yields rise.  This is the message to Merkel, find a way to allow us to print, or your bond market will revert to private demand levels too.

The fascinating thing is that UST's and gilts are now "safe havens".  That's ridiculous because both of those central banks have resorted to QE as a way of life.


Thu, 11/24/2011 - 11:32 | 1910625 MarkTwainsMustache
MarkTwainsMustache's picture

Same day BTI issued 700million in pound denominated debt the republic of Germany could barely pull of 5 times that.  Investors are worried about the future of the Euro currency more than they are worried that Germany will be able to pay its debts.  

Do NOT follow this link or you will be banned from the site!