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Revisiting Today's "Failed" Bund Auction: Less Than Meets The Eye
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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With Ireland down they need to step up the Caribbean banking center and "uk" unrelenting bid
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!
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!
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.
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?
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.
It is suppossed to be safe ...............
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.
Shit.
http://fucklloydblankfein.blogspot.com
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.
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?
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.
LOL! Damn that's funny.
Wait till we get "US Covered bond Act of 2011". If congress passes this it's game end!
there is a lot of hidden corruption here.
http://expose2.wordpress.com
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.
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.
Unless you are short term trading these, I cannot comprehend why anyone would buy this shit (shit = any sovereign bond).
They stack the pension funds with that shit
Well they better buy their own shit...they created it....
How does one say Quantitative Easing in European? The European Central bankers are writing their letters to Father Christmas.
"Damn the torpedoes!"
maird!
Here you go, Angela.
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"Father Christmas, give us some money..."
http://www.youtube.com/watch?v=0rSChOBQV_I&feature=related
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!
"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"?
the trope goes: "The dollar is an I O U Nothin!, and the Euro is a WHO? O's U Nothin'!"
"What the fuck is a "Zone"? "
Uh, here I think the Eurogenous Zone is Merkels G-Spot.
slewie wants a Buba bankster bobblehead doll for Xmas
please can i have one? please?
Bundes-BLANK
"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.
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":
http://www.marketwatch.com/story/poor-german-auction-shows-crisis-hittin...
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.
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?
is the same sort of thing possible in japanese bonds?
The best part is the US still does not think this will ever happen here...tisk, tisk!
Maybe investors are buying cheap German via EIB or KFW or EBRD or EFSF or WestLB ?
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....
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.
This article makes zero sense.
Let's try in simpler terms then:
No demand. Nothing more. Nothing less.
Better?
Insufficient demand for the selling price. Which is more than meets the eye if you think about it.
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.
yo, t_c_t!
fill tyler's glass, wouldya please?
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).
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.
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.
Wait when the U.S. bond market has a failed auction.
libertarian86.blogspot.com
Define "failed"
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!
Surely nobody wishes to see war and people killed.
Although riots are kinda fun to watch.
here!
let's fill your glass, too!
Brownies made from THC oil for me tonight. Stuck in the middle of nowhere on a business trip.
like chesterfield cigarettes: not a cough in a carload!
put some out for people tomorrow morning!
where tf are you? canada?
The FED would monetize the USTs so there would be no UST failed auction, just inflation.
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.
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.
Only if they're issuing the bonds in another currency (which could happen).
Bindung Bürgerwehr
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.
http://www.bloomberg.com/news/2011-11-23/japanese-shift-funds-to-gilts-f...
What? No negative repos? No secret Buba monetization society? Just lack of demand?
Unpossible.
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.
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!
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.
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.)
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?
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
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.
USD selling pressure continues and the prospect of an equity xmas rally and EURUSD bullish spike returns.
http://stockmarket618.wordpress.com
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.
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.